Q2 2024 Earnings Roundup: Tech and Investment Firms Show Mixed Results

Ichor Holdings, Ltd. (ICHR) Q2 2024 Earnings Call Transcript

Claire McAdams - Investor Relations & Strategic Initiatives Jeff Andreson - Chief Executive Officer Greg Swyt - Chief Financial Officer Good day, ladies and gentlemen and welcome to Ichor's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce your host for today's call, Claire McAdams, Investor Relations for Ichor. Please go ahead. Claire McAdams Thank you, Maria. Good afternoon and thank you for joining today's second quarter 2024 conference call. As you read our earnings press release and as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in our earnings press release, those described in our Annual Report on Form 10-K for fiscal year 2023 and those described in subsequent filings with the SEC. You should consider all forward-looking statements in light of those, and other risks and uncertainties. And additionally, we will be providing certain non-GAAP financial measures during this conference call. Our earnings press release and the financial supplement posted to our IR website each provide a reconciliation of these non-GAAP financial measures to their most comparable GAAP financial measures. On the call with me today are Jeff Andresen, our CEO and Greg Swyt, our CFO. Jeff will begin with an update on our business, and then Greg will provide additional details about our results and guidance. After the prepared remarks, we will open the line for questions. Thank you, Claire and welcome, everyone to our Q2 earnings call. We are pleased to report solid second quarter results with $203 million of sales near the top end of our forecast, continued sequential improvement in gross margin and EPS of $0.05. Ichor's business model typically generates strong earnings leverage as revenues increase. And in Q2, the stronger gross margin performance and modest sequential revenue growth yielded an 85% improvement in operating income compared to the first quarter. We are encouraged by the early signs of a recovery in the wafer fab equipment market and our forecast continues to strengthen for a stronger second half. In the meantime, we remain steadfast in our focus on gross margin improvement initiatives that we expect will drive yet another sequential increase in margins and profitability for the third quarter, even its similar revenue volumes. While our gross margin is the most significant lever driving EPS growth, we also continue to carefully manage costs and working capital to add further tailwinds to profitability and free cash flow performance as return the corner to sustain growth in our top line. From a demand perspective, increasing confidence in a stronger second half for Ichor reflects upticks in demand from every key customer within WFE. The only meaningful offset to this improving demand profile is our emerging silicon carbide gas panel business, which we expect will be lower in the second half compared to the first half, but is still an incremental driver to our future revenue growth as that market recovers. Within an overall demand environment indicating modest single-digit growth for 2024 and a return to a more meaningful growth in 2025, I'll share my views on the key technology inflections and CapEx investments that will drive our return to revenue growth outperforming the overall industry. In leading edge logic, gate-all-around device architecture is estimated to require an additional 30% more process steps than the latest generation of FinFET, equating to more process tools per wafer as the device manufacturers incorporate new steps for ALD, Epi, selective etch and CVD. The growing investments in high-bandwidth memory DRAM to enable AI driving close to 20 additional process steps per wafer, in particular for etch, CVD, ECD and clean steps. While we are not seeing an initial recovery in 3D NAND investments beyond technology transitions, we do expect NAND spending will further improve in 2025, which will benefit our business given the greater etch and deposition intensity for this application. Our silicon carbide gas panel business, which has slowed heading into the second half is expected to return as a growth driver in 2025 to support the additional capacity that will need to be put in place in the next few years. And while the more modest pace of EUV deployments has slowed our quarterly build rate of gas delivery systems through the first half of this year, we expect the second half to be stronger and continue to grow as we move into 2025, another tailwind to our growth. Finally, in our non-semi business, we are seeing a return to pre-downturn demand levels, as well as incremental share gains ahead within IMG's customer base in aerospace and defense, as well as certain commercial markets. As each of these markets and applications continue to expand, we see opportunities for Ichor to increase our revenue potential, and continue to add breadth and diversification to our customer base, altogether building a strong story for Ichor's revenue growth as the industry recovery accelerates. Given all of these drivers, we believe we could see strong growth for our primary served markets within WFE through the next cycle, in particular, deposition, etch and EUV, as well as in our non-semi business. Now, I'd like to update you on our proprietary products pipeline, including our next generation gas panel. We continue to make steady progress in growing our new products this year and are seeing the impact on our profitability with improved gross margin on similar revenue levels. I'll start with our next generation gas panel. We have now shipped over 20 gas panels, which is consistent with the outlook I provided on our last earnings call. Most of these new gas panels are on our customers' evaluations tools that have been shipped to a device manufacturer. Our new gas panels contain about 80% proprietary Ichor content, compared to around 10% today, which will drive significant expansion of our gross margin profile. These tool evaluations typically take about nine months to complete. To the earliest, the initial evaluation will be completed and production shipments can begin remains in the fourth quarter. We have been qualified on three applications and are now expecting to complete two additional applications in the next three months to four months. As for our new components products, we are now qualified on fittings that are used in our weldment business, substrates used in our gas panels, seals and high-purity valves. These are all critical components used in the existing gas panels that we assemble. These specific products are now qualified at three customers and have continued to ramp since we began shipping in the second half of the first quarter. All of these new component qualifications can be used in both our existing gas panels that we build today, as well as are all designed into our next generation gas panel. In summary, I'll remind everyone here today that our revenues tend to recover more sharply when industry spending rebounds. Furthermore, our business model and financial profile tend to generate significant operating leverage as revenues grow. In contrast to last quarter, when any meaningful uptick in revenue growth was outside of our three-month visibility; today, we are pleased to report that a return to sequential growth is now firmly within our near-term forecast. Our confidence is increased around the strongest second half, largely due to the recent strengthening of the Q4 demand profile. We are encouraged by the strengthening outlook for Q4 as we move into what is expected to be a much stronger WFE year in 2025, which means we look forward to ramping revenues back towards the $250 million to $300 million plus level next year. We expect to be able to deliver significant earnings growth as revenue volumes increase, which is why we continue to make critical investments in our business in support of future growth. With that, I'll turn the call over to Greg to recap our Q2 results and provide further details around our Q3 financial outlook. Greg? Greg Swyt Thanks, Jeff. To begin, I would like to emphasize that the P&L metrics discussed today are non-GAAP measures. These measures exclude the impact of share-based compensation, amortization of acquired intangible assets, non-recurring charges and discrete tax items and adjustments. There is a useful financial supplement available in the Investors section of our website that summarizes our GAAP and non-GAAP financial results, as well as a summary of the balance sheet and cash flow information for the last several quarters. Second quarter revenues were near the upper end of our forecast at $203 million, up slightly from Q1 and 10% higher than the same period last year. Gross margin improved 80 basis points sequentially to 13%, which was in line with expectations. We are starting to recognize the benefit of our internally-produced products, as well as continued improvement in factory efficiencies. Q2 operating expenses came in below forecast at $21.9 million, a little lower than Q1 due to favorable labor related costs and continued efforts to control variable spending. Our operating income for Q2 was $4.5 million. Our net interest expense of $1.9 million was down significantly from the Q1 expense of $4.1 million reflecting the benefit of our $115 million debt reduction during Q1. Our non-GAAP net income tax expense was above our forecast at $800 thousand, which had a $0.01 impact on our EPS within the quarter. The resulting net income per share was $0.05. Now, turning to the balance sheet. at the end of the quarter, our cash and equivalents totaled $114 million, a $12 million increase from Q1. We generated $17.5 million in cash flow from operations and after deducting $2.8 million of capital expenditures, our free cash flow was $14.6 million. Accounts receivable decreased from the previous quarter on improved linearity and DSOs were 29 days. Inventory decreased $9 million during the quarter to end the quarter at $231 million and inventory turns increased to 3.0. During the quarter, we reduced our term loan balance by $1.9 million to end the quarter with a total debt of $130 million and our net debt coverage ratio improved to 1.8 times. Now, I'll provide our guidance for the third quarter of 2024. With anticipated revenues in the range of to $195 million to $210 million, we expect our Q3 gross margins will again, improve sequentially to a range of 13.5% to 14.5%. We expect Q3 operating expenses to be approximately $22.6 million, up from our Q2 level of $21.9 million. We expect OpEx to remain at a similar level for the fourth quarter. Net interest expense for Q3 is expected to decline to approximately $1.6 million and we expect it to remain at this level for Q4. We expect to record a tax expense in Q3 of $800,000. For the full year, we are forecasting a slightly higher non-GAAP effective tax expense of $3.2 million. Beyond this year, as you update your models for 2025 and beyond, the assumed effective tax rate should be in the range of 10% to 15%. Finally, our EPS guidance range for Q3 of $0.05 to $0.15 reflects a share count of 34.3 million shares. Operator, we are ready to take questions. Please open the line. Thank you. [Operator Instructions]. Our first question comes from Brian Chin with Stifel. Please proceed with your question. A few questions from maybe, Jeff, just going off some of your commentary, which advanced market are you most encouraged by between say foundry and DRAM in terms of your second-half outlook? And can you also put maybe, some parameters around what that improvement could look like? Are you seeing sort of low single digits more or less? Jeff Andreson Yes. Hey Brian, I would say right now, we're probably seeing a little bigger impact from the high-bandwidth memory. So, we're seeing that on our clean -- the chemical side of the business for sure directly. And we also know we can see some DRAM activity. But remember, we don't see all the sell-through data. But I would say that's -- that is moving along. and then I -- FoundryLogic from what we know is holding up quite well. And I think as they start to continue to develop gate-all-around and bring it to market, we're going to see another uptick on that. But I would say right now, if I would say, handicap, which one is bigger than the other, I'd say the impact from high-bandwidth memory. Brian Chin Okay. That's -- and just in terms of quantifying maybe, that uptick in the second half? Jeff Andreson I think, it's -- I don't have the specifics. but I know that from the first half to the back half, it's actually continued to ramp. Whether it's up 10% in the back half from the front half, I don't have that specific, because we don't have all the sell-throughs. Definitely, versus year-over-year, significantly up. Brian Chin Okay. It sounds like you think Q4 is up over Q3 also kind of if I understand your language correctly. Jeff Andreson Yes. As you can understand my language, I think we're -- at this point of visibility, we're kind of seeing maybe high single digits. So, it's not a massive inflection. I wouldn't say we're going to call it the inflection, but it's a good return to sequential growth for us. Brian Chin Okay. And then good updates in terms of the proprietary products and the fact that it reflected in the Q3 gross margin guidance. Based on the progress you're making there, the potential to ship some next generation panels maybe, by Q4 of this year, maybe that's a swing factor. But you think 15% is sort of an achievable bogey in Q4 when you think about a little bit upward tick in the revenue and those gross margin considerations? Jeff Andreson It's not revenue growth you asked, it's gross margin. I would say yes, we kind of as we see it at those revenue levels, we'd probably be right in the mid-15s or so. Some of that is a bit of a recovery and some mix, but a lot of it is just the continued progress with really the new, I'll call them the passive products. And we are taking there's revenue each quarter. It's relatively small, but we're seeing revenue from the new gas panels. And as I said, we have 20 deployed already in various stages of evaluation at our customers' customers and there's about 30 more planned for the next two quarters. So, it's starting to move forward. Brian Chin Okay, great. Maybe, just one last quick thing. I know first half 2025 is probably beyond your good visibility horizon, but do your preliminary customer discussions provide any indication of an acceleration in that timeframe? Jeff Andreson I would say that it's hard to make the call whether the trajectory will continue or remain flat in the early part of 2025. I would say consistently, there's a belief that this is going to be kind of a plus 15% growth of which a large part will be litho. Again, it's been relatively flat this year. So, the confidence in next year being a growth year is still there. Exact timing too early to call. Our next question comes from Krish Sankar with TD Cowen. Please proceed with your question. Krish Sankar Yes. Hi, I have three questions. Just first one, you kind of spoke a little bit about confidence and next to being a growth year. Kind of curious, how do you handicap the impact of what Intel said last week. Has that changed your growth profile for next year for Intel? Jeff Andreson I think, yes, I mean obviously, Intel talked about pulling back CapEx. I think it obviously will have an impact. The question is, was that already incorporated in some of the outlooks of people that I think from the analyst community probably not. But I think when we think about the second half of the year, we haven't seen any movement that would indicate that has impacted this year, but it could possibly impact the year obviously in the fourth quarter. But right now, we're not seeing any significant shifts there. Krish Sankar Got you. I mean, I just want -- let me ask you a different way then. Intel basically gave calendar '25 CapEx guidance, which is down 17% year-over-year. If you bake that in, do you still think WFE growth next year? Jeff Andreson That is the direction that we're getting. So, I mean, obviously, we don't have the same fab-by-fab market intelligence as many other larger companies have. but I would say we're not hearing a pullback in outlook. So, whether it's 15% or it comes down a little bit, yet to be seen and maybe, a little bit too early. Krish Sankar Got it, got it. and then I have two other questions, Jeff. Last quarter, you kind of spoke about some ease of delays that you saw from meeting it. I'm just kind of curious, where did those end up sticking out? Do they get to start further? Are you seeing some of this model? How do you think about that? Jeff Andreson I think, specifically around our EUV business, I think Q2 was the low point and we're seeing it grow again. And I would say kind of in the neighborhood of supporting any of the outlooks that have been provided by our customer. So, I think that it was a kind of a reflow temporary and then we see growth again, in the second half versus the first half. Krish Sankar Got it, got it. and then the final question, Jeff, you kind of spoke about the new gas panels and should have higher gross margin. And if I look at some of those, high-proprietary content subsystem component suppliers, we have like 35%, 40% gross margins. Would these new gas panels just by themselves alone have a higher gross margin? How to think about the margin for those? Jeff Andreson Yes. I mean, obviously, we're going to be moving from about 10% internal content to around 80% on some of the initial shipments that we have. So, it'll move it into the lower end of that back and more than likely. But most of the components bring similar kind of margin structures if you were to sell them independently. Our next question comes from Charles Shi with Needham & Co. Please proceed with your question. Charles Shi Hi, Jeff. A question, the first one, what's your thought on NAND WFE recovery, the timing of -- in terms of getting to that reflection point? Obviously, '25, it looks like you're optimistic about next year, but any thoughts on when you're going to see that pick up? First half, second half, mid-year? What's the latest thoughts? Jeff Andreson I mean, I would tell you that we're once removed from our customers that are probably closer to it. We don't really see it inflecting now. I would say largely, the assumption is it's all geared around technology transitions. But I've kind of been saying consistently now for nine months or so that I think it's going to be kind of a mid-year or later time when they'll start adding new capacity. And obviously, we would love it to happen sooner, because it's very etching depth intensity. and so that's very helpful for us. Charles Shi Got it. Yes, obviously. Then, the other question, I do want to ask more about the EUV side of the business. because it's an interesting business, because your revenue leads your customers, revenue by half of year. Your customer's revenue probably leads a lot of the depth and edge, also by some margin. But I recall a while back you were saying you don't really see any infection in the UV build plan. I mean, the demand coming to you, I see the rest of the year. But do you see any pickup? That the way you answered the question to Krish, it sounds like you are seeing some improvement. but I just want to clarify with that. Jeff Andreson Yes. Hey, Charles. Good question. I would say half over half, we see it increasing. I think Q2, we saw it kind of modulate down a little bit in Q1 and some in Q2. And so it's going to increase quarter-over-quarter. I won't tell you how much. but it's going to the back half of the year will be stronger than the front half of the year. So, I think that lines up with all other commentary out there. Charles Shi So, the improvement, would you characterize that as more or less like a sequential improvement or are we -- should we expect some very meaningful inflection to the upside for the UV business? Jeff Andreson Well, I would say, it's more of a function of Q2's drop and then kind of going back to some of the volumes that we saw as we exited the fourth quarter. I mean how that fits into the whole EUV thing. We do more than just EUV, one-for-one match. There's some service components and other things that we saw that. Our next question comes from Craig Ellis with B. Riley Securities. Please proceed with your question. Craig Ellis Yes. Thanks for taking the question and all the colors so far guys. Jeff, I wanted to start just by following up on a point you made on returning to $250 million to $300 million in quarterly revenues. And what I wanted you to understand how you're looking at that. Are customers telling you the business is going to need to be ready to get to those level, or are you seeing visibility just coming from some of the improvement you've been talking about it should look deeper to 2025 or is that just something that's more aspirational for now. but at least things are moving that direction? Jeff Andreson I want to say yes, yes and yes. But the answer is, as we look at next year, I think with 3D NAND not recovering until the second half, it's likely that we could run sideways for a little bit and then start to inflect again. There's pretty strong strength that we see continued around high-bandwidth memory, which we talked about. And I think gate-all-around is going to continue to drive some incremental FoundryLogic. So, I think as we look at it, it's not necessarily aspirational. but I think if you get a 15% year-over-year growth and it's back-half weighted, you'll see those revenue run rates be pretty close in that area. Craig Ellis That's real helpful. And then the second question and it's much more of a near-term question and it may have been implicitly answered in some of your commentary. But earlier this year, you expressed some concern about inventory levels at some of your customers and that being a headwind for sequential gains in the business. Has that issue resolved? Or where do we stand with inventory at different customers and its fitness for the demand that they're seeing? Jeff Andreson Yes. I won't talk specifically at customers. I think that it's not an all for one. We're seeing things be resolved and return back to normal ordering patterns going forward. But what I would tell you is that when you look at the business, I would say, we typically would have seen some surge in our component business already. We still haven't seen that. I'd say, it's still muted from where we expected entering the year, where we're going to exit the year. And so, our gas panel business is actually grown I would say, slightly gas panel, I'll call it integration, which includes our chemical delivery too, slightly above the WFE growth this year. So, the strength has really been in the integration side. Craig Ellis Yes. And so, you're getting some of this nice gross margin improvement without significantly higher weldments or precision machining mix, but you could get that next year. And so, what does that mean for how significantly gross margin can raise next year? Jeff Andreson Well, as you look at it, I think, the flow through on relatively flat revenue is about $2 million, so that's a pretty healthy percentage, well, it's hard to calculate on revenue basis. But it'll help accelerate that, because those are higher margin products. You have the infrastructure in place. So, kind of the incremental margins are probably in weldments, maybe, are in the high-20s and machining can start probably in the mid-30s and go up to around 40 or so. So that'll be helpful, once that inventory normalizes. Our next question comes from Christian Schwab with Craig Hallum. Please proceed with your question. Christian Schwab Great. Thanks for taking my question. Just on the EV silicon carbide side, can you quantify that, give us an idea of what that business is doing strong in, second half of '23, what it's doing now, and what it could recover to back to those type of levels in '25. So, we just have an idea of the order of magnitude? Jeff Andreson I'm not sure we've ever sized it specifically. But I'll give you some relative growth patterns. I would say when we first started delivering gas panels, it was about mid-year in '23. We expected that to naturally double. So, it was kind of running at a relatively flat run rate, that has a kind of fallen off. and I would say growth this year is probably going to be somewhere between 25% and say 50% depending on if we see a fourth-quarter recovery. So, it's dipped down in the second half of this year. But I expect it to return back at least to where we started. Our customer will be adding more customers, but there's clearly a digestion period going on right there. Christian Schwab And your revenue in China, so the silicon carbide EV strength that you're talking about predominantly driven by European manufacturers, you're not selling broadly that you're aware of inside of domestic China. Is that fair? Jeff Andreson No. We sell to a process tool manufacturer and they sell it on. We don't actually know the actual end-use customer. So, I couldn't tell you that specifically, who their customers are, because we don't know. Christian Schwab Okay. All right, great. That's very helpful. No other questions. Thank you. Our next question comes from Tom Diffely with D.A. Davidson. Please proceed with your question. Tom Diffely Yes. Good afternoon. Maybe, first, a follow-up on Craig's question earlier on the margins. When we look at getting back to the $250 million, $300 million range, what is the incremental margin from today assuming just constant mix before all of the new products come into play? Jeff Andreson It would probably be somewhere, depending on the mix 20% or 22% at the high end. It will be north of 25% as you bring new products in is how I would think of it. Tom Diffely Okay. And then Jeff, when we look at the new gas panel -- the next generation gas panel with 80% of your own components, does this require your customers to have a ramping new product? Or is this going to be placed in existing OEM products that are going out the door? Jeff Andreson I would say, initially, it's -- the most of this is focused on new product introductions, intersecting a new tool going out. Having said that, the passive products that we have substrates, seals, fittings, all of this is backward compatible and valves. So, those are being integrated on the gas panels today and being delivered. So, it's a combination of both, Tom. Tom Diffely Okay. So, when you look out to the next generation gas panel itself with 80% content, in your mind is that a two-year to three-year level of adoption or two-year to three-year timeframe to get it across most of the gas valves? Jeff Andreson Yes. because you're incorporating the new mass flow controller, these things will be qualified customer by customer, our customers as well and their customers as well. And I think -- so I think it is a multi-year ramp. I don't think that we believe that will be the sole source of all gas panels. So, as we talked about in the past, you don't need a tremendous amount of penetration into the gas panel market to really move our needle and get into that kind of our model, target model for revenue of '19 to '20. There are no further questions at this time. I would now like to turn the floor back over to Jeff Andreson for closing comments. Jeff Andreson I want to thank you for joining us on our call this quarter. I'd like to thank our employees and suppliers, customers and investors for their ongoing dedication and support. We look forward to the opportunity to meet with investors during the third quarter, including at the upcoming virtual Needham Semiconductor Conference, as well as the Jefferies Investor Conference in Chicago. Please feel free to reach out to Claire directly to follow up with us. We look forward to updating you on our Q3 earnings call scheduled for early November. Operator, that concludes our call. You may now disconnect your lines at this time. Thank you for your participation.

Adeia Inc. (ADEA) Q2 2024 Earnings Call Transcript

Chris Chaney - Vice President-Investor Relations Paul Davis - President and Chief Executive Officer Keith Jones - Chief Financial Officer Good day, everyone. Thank you for standing by. Welcome to Adeia's Second Quarter 2024 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the call will be open for questions. I would now like to turn the call over to Chris Chaney, Vice President of Investor Relations for Adeia. Chris, please go ahead. Chris Chaney Good afternoon, everyone. Thank you for joining us as we share with you details of our quarterly financial results. With me on the call today are Paul Davis, our President and CEO; and Keith Jones, our CFO. Paul will share with you some general observations regarding the quarter. And then Keith will give further details on our financial results and guidance. We will then conclude with a question-and-answer period. In addition to today's earnings release, there is an earnings presentation, which you can access along with the webcast in the IR portion of our website. Before turning the call over to Paul, I would like to provide a few reminders. First, today's discussion contains forward-looking statements that are predictions, projections or other statements about future events, which are based on management's current expectations and beliefs, and therefore subject to risks, uncertainties and changes in circumstances. For more information on the risks and uncertainties that could cause our actual results to differ materially from what we discuss today, please refer to the Risk Factors section in our SEC filings, including our annual report on Form 10-K and our quarterly report on Form 10-Q. Please note that the company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after this call. To enhance investors' understanding of our ongoing economic performance, we will discuss non-GAAP information during this call. We use non-GAAP financial measures internally to evaluate and manage our operations. We have, therefore chosen to provide this information to enable you to perform comparisons of our operating results as we do internally. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the earnings release, the earnings presentation and on the Investor Relations section of our website. A recording of this conference call will be made available on the Investor Relations website at adeia.com. Now I'd like to turn the call over to our CEO, Paul Davis. Paul Davis Thank you, Chris, and thank you, everyone for joining us today. We delivered results for the second quarter that were in line with our expectations, with revenue of $87.4 million and adjusted EBITDA of $52.8 million. I'm pleased with the progress we are making across all aspects of our business and we remain on track to achieve our strategic objectives for 2024. During the second quarter, we signed five license agreements across diverse end markets, including in social media, consumer electronics, semiconductors and Pay-TV. Additionally, shortly following the end of the quarter, we signed a multi-year renewal with Liberty Global, a leading European Pay-TV operator. We continued to pay down our term loan in the second quarter and we saw an opportunity to reprice our debt. I'm very pleased with the terms of the repricing, which will save us over $3 million annually in lower interest expense and provide us with additional financial flexibility moving forward. We remain committed to continuing to pay down our debt and under the new terms, we will be able to take a more balanced approach to capital allocation and return more capital to shareholders and have more firepower for tuck-in acquisitions to help grow our business. Since our separation, we have been diligently working to add license agreements in key growth verticals such as OTT, semiconductors and adjacent media markets. We're very excited with the agreements we've signed to-date and the progress we are making on new deals in each of these markets. During the quarter, we also continued to expand our pipeline of opportunities in both media and semiconductors as we look to continue to grow our business in 2025 and beyond. In the second quarter, we were very pleased to reach an agreement with X Corp, formerly Twitter, for a multi-year license renewal. The agreement resolves all outstanding litigation and I'm pleased that X Corp is a paying customer once again. The agreement further validates the value of our IP and demonstrates our commitment to enforcing the contractual terms we have with our customers. We also signed a multi-year renewal with Panasonic, which continues our success in consumer electronics and signed multi-year renewals with two regional Pay-TV providers in the U.S. In semiconductors, we signed a new long-term agreement with Hamamatsu. This new agreement supplements an existing license, adding access to our die-to-wafer hybrid bonding technology. This new agreement follows from a prior development license to our wafer-to-wafer hybrid bonding portfolio in a technology transfer agreement. Our relationship with Hamamatsu highlights how partnerships with our customers can help accelerate the advancement of their hybrid bonding capabilities and improve their products. As noted earlier, shortly following the close of the second quarter, we also signed a multi-year renewal with Liberty Global, a leading Pay-TV provider in Europe. This deal is significant as we continue to strengthen our customer base internationally. We are on track to meet our objectives for this year and continue to make progress towards our long-term goals. We plan to drive revenue growth by growing our customer base in OTT, adjacent media markets and semiconductors, and by maintaining our strong renewal rates and our well established Pay-TV consumer electronics and social media verticals. To continue to grow our revenue and customer base, it is imperative that we further expand our IP portfolios. We closed the second quarter with over 11,500 worldwide patent assets. Our portfolio growth objectives are focused on maintaining our strong renewal rate while adding new customers in our key growth markets. Our customer relationships are founded on the value of our IP and are fundamental to renewals. Our investments in R&D and augmenting our technical sales and engagement resources will drive the addition of new customers in both existing and adjacent markets. Our priority remains to grow our portfolios organically through investments in internal R&D and inorganically by actively pursuing acquisition opportunities that strategically enhance our organic efforts. Our focus at Adeia is driving next-generation innovations for our customers and markets we serve. As such, we were thrilled to be recognized amongst the most prolific inventors in the world for 2023 by Harrity & Harrity, a leading patent analytics firm. Last year we were granted 554 patents for which we were ranked number 70 in the world for the number of granted patents. We ranked higher on the list than many of the most well respected media companies such as AT&T, Verizon and Comcast, and some of the hottest semiconductor companies leading the AI charge such as AMD and NVIDIA. This is particularly remarkable since these companies have significantly larger R&D resources than we do. Yet, we achieved these results because of our unique business model, which allows our dedicated scientists and engineers to be exclusively focused on critical forward-looking innovations. I am immensely proud of our team for this accomplishment. Thought leadership is one of our hallmarks and demonstrates our commitment to innovation. Our R&D professionals continue to fully engage in the ecosystems in which we participate, delivering insightful presentations, speaking on topical panels at industry conferences and publishing research on important forward-looking trends. In the second quarter, members of our media team presented Computing While Cooling at Streaming Media NYC and participated in a panel on the pivotal role of R&D in gaming innovation at the XP 2024 Game Summit. Likewise, members of our semiconductor team gave two presentations on hybrid bonding at this year's Electronic Components and Technology Conference in Denver. I was particularly proud that our paper on fine pitch died away for hybrid bonding was recognized as best session paper at the conference. Additionally, we delivered a presentation on co-optimization of semiconductor systems at the 2024 SEMI 3D & Systems Conference. I am very pleased with the progress we have made to date and I am confident we will achieve our 2024 goals. With that, I would like to now turn the call over to Keith for a review of our second quarter financial results. Keith Jones Thank you, Paul. I am pleased to be speaking with you today to share details of our second quarter 2024 financial results. During the second quarter, we delivered revenue of $87.4 million driven by the execution of five license agreements across a diverse mix of end markets including social media, consumer electronics, semiconductor and Pay TV. These results are in line with our prior expectations as we anticipate seeing strong momentum in the second half of the year. Now, I would like to discuss our operating expenses, for which I'll be referring to non-GAAP numbers only. During the second quarter, operating expenses were $35.1 million, an increase of $1.2 million, or 3% from the prior quarter. Research and development expenses increased $590,000, or 4% from the prior quarter. The increase in the second quarter is primarily related to patent filings and related maintenance costs. Selling, general, administrative expenses decreased $773,000 or 4% from the prior quarter, primarily due to the recovery of bad debt expenses associated with the resolve contract dispute with X Corp and due to lower corporate administrative costs. These decreases were partially offset by increased third-party spending associated with the build-out of our licensing platforms in OTT, semiconductor and adjacent media markets. Litigation expense was $4.3 million, an increase of $1.3 million, or 45% compared to the prior quarter, primarily due to the timing of expenses related to certain legal matters. Interest expense during the second quarter was $13.3 million, a decrease of $879,000 from the prior quarter due to the benefit of a lower interest rate following the successful repricing of our term loan B and due to our continued debt repayments. Our current effective interest rate, which includes amortization of debt issuance costs, was 9.6%. Other income was $1.4 million and was primarily related to interest earned on our cash and investment portfolio and due to interest income recognized on revenue agreements with long term billing structures under ASC 606. Our adjusted EBITDA for the second quarter was $52.8 million, reflecting adjusted EBITDA margin of 60%. Depreciation expense for the quarter was $490,000. Our non-GAAP income tax rate remained at 23% for the quarter. Our income tax expense consists primarily of federal and state domestic taxes as well as Korean withholding taxes. Now for a few details on the balance sheet. We ended the second quarter with $94.5 million in cash, cash equivalents and marketable securities and generated $23.5 million in cash from operations. We made $12 million in principal payments on our debt in the second quarter and ended the quarter with a term loan balance of $549.1 million. During the second quarter, in light of favorable market conditions, we saw an opportunity to reprice our existing term loan agreement. We are very pleased with the outcome of the repricing as we achieved two significant benefits. First, we successfully lowered the fixed interest rate component by 61 basis points. This results in a significant $3.4 million savings on an annual basis. Secondly, we greatly reduced the mandatory excess cash flow payment thresholds, effectively providing us with greater financial flexibility on our uses of capital as we exit 2024. Specifically, while we remain dedicated to deleveraging our balance sheet by continuing to make accelerated payments on our term loan, this improved flexibility will allow us to take a more balanced approach in returning capital to shareholders through stock repurchases in addition to our current dividend program. Additionally, we have increased our capacity to grow our business through tuck-in acquisitions. During the second quarter, we paid a cash dividend of $0.05 per share of common stock. Our Board also approved a payment of another $0.05 per share dividend to be paid on September 17 to shareholders of record as of August 27. Now, I will go over our guidance for the full year 2024. We are pleased with the progress we are making on executing our sales pipeline. Consequently, we are reiterating our prior revenue guidance for the full year. We expect revenue to be in the range of $380 to $420 million, which includes significant new license agreements in both OTT and semiconductor in the second half of the year. During the first half of the year, we have seen continued execution of our various strategic objectives. As the year has progressed, we have achieved these goals with lower than expected third-party spending as we develop our new licensing platforms. We have been able to leverage our internal resources to a greater extent than initially planned. Additionally, our litigation expenses have been somewhat lower than expected due to the settlement with X Corp. and the timing of ongoing litigation. As a result, we are lowering our guidance for operating expenses and we expect them to be in the range of $145 million to $155 million, which is $5 million less than we previously guided. We remain dedicated to our commitment to R&D as we grow and expand our IP portfolio. Because of our lower interest rate from our debt repricing, our interest expense will be less than we originally anticipated. As such, we are lowering our guidance for interest expense to be in the range of $52 million to $55 million, which is $2 million less than we previously guided. We expect other income to be in the range of $5 million to $6 million. We expect a resulting adjusted EBITDA margin of approximately 63%. We expect the non-GAAP tax rate to remain consistent at roughly 23% for the full year. We also expect capital expenditures to be approximately $2 million for the full year. The second quarter was in line with our expectations. We are progressing nicely on all fronts and remain confident we will achieve our goals for the year. The concerted efforts of the entire Adeia team will serve as a springboard for success as we strive to grow and expand our exceptional business model. That brings an end to our prepared remarks. And with that, I'd like to turn the call over to the operator to begin our question-and-answer session. Operator? Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Kevin Cassidy with Rosenblatt Securities. Your line is open. Kevin Cassidy Hi. Yes. Thanks for taking my question and congratulations on the great progress for 2024. I just wondering, there is news out on some OTT companies raising their prices to consumers. Do you have any view on how this would affect both your OTT market or even your Pay-TV market? Paul Davis Hey Kevin, great question. I think we're focused obviously on the OTT market. As you note, we've made some really nice strides in getting deals done with the [indiscernible] Paramount recently. And we've signaled that we anticipate having success in the OTT market with some more significant players here this year as well. And so with our engagements, we typically look at the number of subscribers that an OTT platform might have. Certainly, price comes into it in terms of, as we compare it to what our rates are that we have with Pay-TV. But we don't think it will have a significant impact ultimately to what we're able to achieve from a licensing standpoint with our business. Kevin Cassidy Okay, great. And maybe as a follow-up, talk about the semiconductor market, there's plenty of news out there around high bandwidth memory having yield issues, or various trying to keep up with demand, and same with on the GPU side. Can you say, what do you see in your pipeline as far as where some of these issues are coming up as your pipeline might be getting bigger and maybe even moving to a broader use of chiplet designs? Paul Davis Yes. It's certainly what we see with chiplets architecture on the logic side is something that we continue to monitor and see new companies talk about that. Intel announced a chiplet type architecture with a product that they plan to announce in 2025. Obviously, AMD's had one - has had used chiplet architecture for a few years now and continues to increase the number of products that they have. And we think that will continue to be the trend as really the limits of Moore's Law and traditional ways have come to their limits there. As it relates to high bandwidth memory, certainly, we're excited about HBM4 and the possibility that at least some version of that down the road will include - a need to include a hybrid bonded process as well to really get to the level of performance that we think they'll need to. It could be a few years until that happens, but certainly it lines up well with when likely our memory licensees would be up for renewal as well. Our next question comes from the line of Hamed Khorsand with BWS Financial. Your line is open. Hamed Khorsand Hi. First off, I just want to ask what's changed in the business in these last six to eight months, where your commentary today has really, you're putting some emphasis on tuck-in acquisitions and making some sort of acquisition? Paul Davis Yes. Hamed, I think that's a - it's a great question. Certainly, we've actually always focused on doing tuck-in acquisitions. It's something that's been part of our playbook. We focus on internal R&D though, first, and that's not going to change. So 85 plus percent of our portfolio is homegrown. It's from our inventors and we see that really maintaining in that zip code. However, there are occasionally opportunities that come to us or that we source where we see an opportunity to really add to the portfolio that augments our internal efforts as well. And so that really hasn't changed. We do like to highlight it, though. We did close a few deals earlier this year. It's something that we - as we look towards really expanding our markets into some of the adjacent markets and even in semiconductors, where we see really opportunities to accelerate the revenue opportunity as well, if we can add a high quality portfolio to our own internal efforts as well. Hamed Khorsand Okay, my other question was, is there a timing that you're expecting with these streaming and semiconductor license deals that you've been talking about all year? Paul Davis Yes, I think one of the things that we always note is that what we do is very large deals, and trying, but we don't do a high volume of them. Getting the economics right, working with the customers is something that we really pride ourselves on in terms of getting the best economics that we can. And so we focus on that aspect, getting the right deal done, rather than trying to accelerate the timeline and have to take a deal that we're not happy with. And so the exact timing of it can shift quarter-to-quarter. But given where the deals are that we have in our pipeline, we're still very confident that they'll close this year. And that's really what we've been saying all year in the exact quarter, though. Hard to predict. Hamed Khorsand Okay. Just to follow up on that, if I may. You're running out of average so far this year, about $85 million per quarter. Is that a good baseline for the business? Or is it going to be higher without the licensing deals happening? Keith Jones Hi, that's a great question. So I think that $85 million is not necessarily based on. There's a number of renewals that we're working on. And then if you add in the subsequent license agreements that Paul's referring to that we talked about, both for OT and semiconductor, you're going to have a much higher baseline revenue level. So that is not what we see as an ongoing run rate. We see that run rate being much higher and that acts as a really good springboard as we move forward into 2025. And we do have, our last question comes from the line of Matthew Galinko with Maxim Group. Your line is open. Matthew Galinko Hey, thanks for taking my questions. Maybe firstly, with respect to the larger deals that we're kind of looking for in the back half of 2024. How does the, I guess, how does the expectation for interest rate environment and kind of the macro backdrop influence the discussions around those licenses? Can - is there a risk that, uncertainty in macro could prolong discussions or just help us understand, some of the sensitivity there? Keith Jones Yes, Matt, I think, you know, we've, we often get that question, especially in times of uncertainty. And what we've experienced historically, given the long term nature of the deals that we do, is that usually has very little impact on the overall timing or economics that we're able to achieve. I think the customers that we are often talking to are very large, sophisticated companies. They understand that there's going to be various cycles that the industry goes through. Certainly on the semiconductor side of things, there are very well known cycles where there are ups and downs and same with media, whether it be in advertising or otherwise, where you see cycles of really a boom and then a slowdown. For us, though, we're usually able to navigate through that and get those deals done really at the same level of expectations we have. And so we don't anticipate really seeing any sort of challenges because of that environment. Matthew Galinko Okay, thanks. And then I guess on the question, on the OpEx run rate, it sounds like you had a couple of moving pieces in the OpEx number this quarter, some in favor and then maybe some increase in outside spending. So I guess, can you give us a bit of a sense of what we should be expecting as the baseline moving forward? I guess we could kind of back into it with your guidance, but maybe if there's anything you could share that kind of pushes us in the right direction. Paul Davis Yes, Matt, great question. So if you take a look at our OpEx, we'll kind of look at a few items here. So our R&D has been on an upward tick, and that's by design and plan. We continue to make a considered effort to invest and grow our patent portfolio. So we will continue to see that trajectory. And if you take a look at even the amount relative to our revenue as a percentage, it's going to be in that mid-teens throughout the remainder of the year. So that is the path that we had anticipated to continue to go through that. And also what you see from there is us making some of those investments outside from a third-party perspective to help accelerate some of those efforts. On the SG&A side, we had a good guy, as I like to call it, we had the bad debt recovery. But if you kind of even that out, and as well as some of the administrative costs, we would have had a slight uptick quarter-over-quarter, if you just kind of balance those two. Well, what we've seen, and quite frankly this puts a smile on my face, is being part of the management team is we've actually done a tremendous job internally of developing out these new platforms. When I say these new platforms, it's the six new areas in our new media and then also on semiconductor side, most notably, as we talked about co-optimization. So what we really wanted to do was give ourselves a lot of expertise in wiggle room just to really kind of grow these platforms. And with that, doing deep dives in terms of learning about the customers, doing product breakdowns and all those other good things. And what we found is that while we have a new team we have a very talented team that gets up to speed extremely quickly. So we are making great progress with a less of a reliance on outside third parties. And that's what you see in terms of us bringing down our overall guidance, in part with a little bit lower spin in the first half of the year on litigation. But you will see an uptick in Q3 and then a little bit more modestly in Q4. As you see, we reset the guidance to be about $5 million lower than we set out the beginning of the year. That concludes the question-and-answer session. Mr. Paul Davis, our CEO, I turn the call back over to you. Paul Davis Thank you, operator. I want to thank our employees for the strong first half of the year and the progress we have made towards achieving our goals for 2024. Later this month, we will be participating in the Rosenblatt Age of AI Conference and at the BWS Securities Conference in New York City. We look forward to seeing you at these events and at other investor events in the coming months. Thank you for joining us today. Ladies and gentlemen, that concludes today's conference call. You may now disconnect.

Veeco Instruments Inc. (VECO) Q2 2024 Earnings Call Transcript

Rick Schafer - Oppenheimer & Company Charles Shi - Needham & Company David Duley - Steelhead Securities Thomas O'Malley - Barclays Gus Richard - Northland Capital Mark Miller - Benchmark Greetings, and welcome to the Veeco Q2 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anthony Pappone. Thank you. You may begin. Anthony Pappone Thank you and good afternoon, everyone. Joining me on the call today are Bill Miller, Veeco's Chief Executive Officer; and John Kiernan, our Chief Financial Officer. Today's earnings release and slide presentation to accompany today's webcast is available on the Veeco website. To the extent that this call discusses expectations for future revenues, future earnings, market conditions, or otherwise make statements about the future, these forward-looking statements are based on management's current expectations and are subject to the risks and uncertainties that could cause actual results to differ materially from the statements made. These risks are discussed in detail in our Form 10-K Annual Report and other SEC filings. Veeco does not undertake any obligation to update any forward-looking statements, including those made on this call, to reflect future events or circumstances after the date of such statements. Unless otherwise noted, management will address non-GAAP financial results. We encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release and at the end of the earnings presentation. Veeco delivered second-quarter top and bottom line results in line with our guidance. Revenue totaled $176 million, non-GAAP operating income $28 million and non-GAAP EPS of $0.42. Our semiconductor business remains strong highlighted by record laser annealing revenue and new LSA orders in advanced logic and memory. In logic, we received follow on orders for a leading customers gate all around architecture. And in DRAM, we continue to receive follow-on business to support our customer's planned expansion. I'll now provide an overview of the technologies driving business today. Our served available market expansion opportunities and our investment strategy. New device architectures and shrinking geometries are creating scaling challenges for our customers. As a result, new annealing capabilities are required to manufacture the highest-performing chips and our LSA systems are qualified at all leading logic customers for their gate-all-around architecture. In ion beam deposition for EUV mask blanks, Veeco is the market leader for defect-free films. Our ion beam deposition technology is a key enabler of our customer's roadmaps, and we're in a strong position to support growing demand for EUV lithography. Moving forward, we're focused on expanding our business to new mask blank applications. In Advanced Packaging, growth in high bandwidth memory is driving demand for our wet processing systems, and our customers are expanding capacity. Our investments in advanced logic and memory have enabled our semiconductor business to outperform WFE growth over the past three years. Looking ahead, we're investing in core technologies to expand our served available market. Beginning with laser annealing, we have a substantial opportunity to grow our SAM from $600 million today to over a billion dollars, driven by adoption of laser spike annealing in memory and the introduction of nanosecond annealing. Our laser spike annealing system is qualified at one tier-one DRAM customer, and we're making progress with the other leaders in nanosecond annealing. We're equally as excited to expand to new advanced applications. We also have a significant opportunity in ion beam deposition to grow our SAM to $350 million for front-end semi-applications where a deposition of low-resistance metals is most critical. And in the compound semi-market, we're focused on long-term opportunities within power electronics and photonics. We continue to increase investments in our evaluation program for core technologies focused on solving Tier 1 customers' high-value problems. This is a key element in supporting our long-term growth strategy. In the semiconductor market, our nanosecond annealing and ion beam deposition evaluation systems at customer sites are progressing well and we're targeting additional evaluation system shipments in early 2025. We're also making progress towards an LSA evaluation shipment to a second leading DRAM customer in early 2025, and we recently shipped a 300-millimeter GaNon silicon evaluation system to a Tier 1 power device customer in the compound semi-market. I'd now like to take a deeper dive into two of our largest opportunities in the semiconductor market. Scaling challenges are driving the need for new annealing capabilities, and our nanosecond annealing technology offers a substantial opportunity to broaden laser annealing adoption to new applications. Due to our system's laser and architecture, we can achieve a lower thermal budget and shorter dwell time versus today's most advanced annealing solutions. This enables a shallow anneal with the precision to modify only the surface level of the wafer, potentially ideal for new applications such as backside power delivery and 3D devices. Our NSA system can also improve performance by changing the structure and properties of the device, opening the door to new material modification steps. As we look ahead, we see potential for initial high-volume manufacturing orders from logic customers in 2025. Turning now to ion beam deposition for 300-millimeter front-end semiconductor applications. Veeco is the industry leader in ion beam deposition technology, which is a key enabler in driving aerial density growth in the hard disk drive industry over decades. This core technology also enables EUV mask blank production and has direct applicability for advanced semiconductor wafer-level manufacturing. Lower resistance metals are increasingly critical to maintaining device performance, and as device geometries continue to shrink, traditional deposition technologies are struggling to lower resistivity. Our ion beam deposition technology differentiates itself through its ability to achieve superior thin film properties, making it ideal for advanced applications where low-resistance films are critical. Based on Tier 1 customer data, our ion beam-deposited tungsten and ruthenium films are demonstrating lower resistance compared to traditional deposition technology. In DRAM, this enables tungsten bit line scaling while maintaining electrical performance of the device. For logic, ruthenium metallization can enable new integration schemes at future nodes. I'd now like to touch upon artificial intelligence and the role Veeco plays in the AI chip manufacturing process. Growth of AI is requiring the most advanced technologies to manufacture higher-performance chips. As we look ahead, we expect several Veeco technologies to benefit from growth in AI. Our LSA systems for transistor formation are used for GPU and CPU production at all leading logic customers most advanced nodes. For HBM DRAM, our first customer has adopted our LSA system for both the logic die and the peripheral logic on each HBM DRAM die. In ion beam deposition, our IBD system enables mask blank production for both GPUs and HBM DRAM. Equally as important, we see future opportunities for our nanosecond annealing and ion beam deposition solutions for each in wet processing. Our systems support advanced packaging for AI by enabling flux clean of micro bumps at leading foundry and memory customers as well as OSATS with similar packaging processes. Looking ahead, we're excited to continue supporting our customer's planned expansions. With that, I'll turn it over to John for a financial update. Turning first to our revenue for the quarter. Revenue came in at $176 million in line with our guidance, up 9% from the prior year and 1% sequentially. Our semiconductor business performed well during the quarter, comprising 63% of revenue led by record laser annealing. Semiconductor revenue declined 9% from a record in Q1. However, in the first half increased 16% year-over-year. In the compound semiconductor market, revenue declined from the prior quarter to $18 million, totaling 10% of revenue. In line with expectations, data storage revenue increased to $34 million, comprising 19% and lastly, scientific and other made up 8%. Now, turning to quarterly revenue by region. The percentage of revenue from China totaled 37% during the quarter in line with the prior quarter, led by sales to semiconductor customers. Revenue from Asia Pacific region excluding China was 25%, the United States 24% and EMEA at 14%. Switching gears to our non-GAAP quarterly results, gross margin totaled approximately 44% toward the high end of guidance. Operating expenses totaled $49 million in Q2 above our guidance, primarily due to the timing of R&D investments. Tax expense for the quarter was approximately $4 million, resulting in an effective tax rate of 12%. Lastly, net income came in at approximately $25 million, and diluted EPS was $0.42 on 62 million shares. Our diluted share count increased by approximately two million shares in Q2 from Q1. This was primarily driven by a higher Veeco share price, which increased the diluted share count associated with our 2029 convertible notes. Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $305 million, a sequential increase of $8 million. From a working capital perspective, our accounts receivable declined by $14 million to $92 million. Inventory increased slightly by $2 million to $245 million, and accounts payable declined by $7 million to $47 million. Customer deposits included within contract liabilities on the balance sheet declined by $13 million to $59 million. Cash flow from operations came in at $8 million and CapEx $3 million. Now turning to Q3 non-GAAP guidance. Q3 revenue is expected between $170 million and $190 million. By market, we expect growth sequentially in semiconductor and similar levels of revenue for the remaining markets. We expect gross margin between 43% and 44%, OpEx between $48 million and $50 million, net income between $24 million and $31 million, and diluted EPS between $0.39 and $0.49 on 63 million shares. And now for some additional color beyond Q3 as we're halfway through the year. We're tightening our 2024 revenue guidance to $690 to $730 million from our prior range of $680 to $740 million and correspondingly, we now expect diluted non-GAAP EPS for the full year between $1.65 and $1.85 per share from our prior range $1.60 to $1.90 per share. With that, I'll now turn the call over to the operator to open up Q&A. [Operator Instructions] The first question we have is from Rick Schafer of Oppenheimer & Company. Please go ahead. Rick Schafer Thanks guys. Nice quarter. I had a couple of questions. The first Bill is kind of a high-level one, I believe, correct me if I'm wrong please, but I believe your EV hit rate is ALs 100% in terms of converting to design, win, and ultimate new. And I know a few years ago you decided to support roughly 10 EVALs a year, up from, I think, three to four previously. And I mean, I realize bandwidth is finite, but I'm just curious how you're thinking about that. How do you weigh growth, the growth opportunities that you see out there against the costs, given the high success rate that you've had and I'm basically asking if you've ever thought about an increase that you're supporting annually. Bill Miller Rick, thoughtful question, and I hate to say 100%, but I think you're right. Actually, knock on wood that we had a lot of success with the last round of evaluations we put into the field. Clearly, that gives us confidence as we place EVALls in the field. We did just place in the fourth quarter to ion beam deposition systems for memory and to nanosecond annealing systems in logic. We have a laser annealing system out in the field for a second memory customer. So we have a lot of irons in the fire and we're planning more at the end of the year and widening our breadth of evaluations in 2025. I think for us, it does give us some confidence that we know how to support these in the field, how to support the tools in the factory and be responsive to our customers. That, as you said, gives us some confidence. I think the one thing that John and I need to kind of manage is not get out too many at a time. That if there is some type of a problem that we need to attack it aggressively. We're resource-limited. That's probably the governor on the EVALs, which is effectively a governor a bit on our growth. I think we do a good job of managing, being aggressive, and working with the leaders in the industry and working closely with them, but not getting ourselves into a situation where we're overextended. That's the calculus. Rick Schafer Got it. That makes sense. And then if I could just on a quick follow up. I appreciate, John, you tightened in the range again around the midpoint, which you've been tracking to all year. I guess I'm curious with now you've given the guide for 3Q, w don't really know about 4Q yet, but we can. I guess I'm really curious, what are the puts that you see in terms of hitting or exceeding, let's say, the high end versus the lower end of the new range? John Kiernan Yes. So, thanks for the additional question, Rick. So, in our view, we've narrowed the range because we're sort of halfway through the year. I would say compared to our initial expectations here, the expectations haven't changed significantly by the various markets. I would say that semi is slightly stronger and so we're now thinking for the full year in semi, when we compare it to last year, to be up high single digits, low double digits. And I'd say that on the flip side, we see slightly lower contribution from compound semi-space where we're now saying, flat to slightly down. We were flat to slightly up there. The next question we have is from Charles Shi of Needham & Company. Please go ahead. Charles Shi Hi. I want to -- my first question is about the follow-on business you received from the tier one DRAM customer, I assume that's LSA. But I do want to ask, it sounds like you received the order, but when will the order turn into revenue? What's the expectation? How big is the order? Is there any way you can kind of characterize that for us because the HBM ramp is something that people really are bullish about but since you only, you probably have -- are qualified of only one customer want to have some color on the timing and the size of the ramp next. Thanks. Bill Miller I think you're talking about the Q2 order we announced in our press release. That was for a two-system order for a gate-all-around two-nanometer pilot line and I believe those two are scheduled to either ship in Q4, Q1, John? John Kiernan Yes. So I think Charles may be asking about in our scripted remarks that we just presented that we receive follow-on business from our DRAM customer and yes, in LSA we have one leading DRAM customer for HBM where we've been shipping laser spike annealing tools for their HBM product. We've had ongoing orders from that customer, they're bringing up their production there and we continue to receive follow-on orders, and we see that continuing into the future here. What we've said is that typically when we win an application at a customer for laser annealing and we win one application for a customer, that it typically comes in sort of a chunk of $25 million to $35 million of business, a handful of tools. These tools are in the $6 million to $7 million range. So we're at the early stages of the laser annealing adoption. But that level of intensity that we've seen typically in the adoption of logic, at least at this point, and foundry logic is progressing at a similar intensity in DRAM. Bill Miller I guess I'll just add one comment, John. We started with that customer originally winning just the base logic die, and now we've expanded to the peripheral logic on each of the multi-level stack of the HBM DRAM device, which obviously drives more wafer starts. Charles Shi So is the timing, is there some revenue of the repeat orders in second half, or is it more like 2025 events? John Kiernan No, we've been having revenue. They started actually shipping tools towards the back half of last year. We've been shipping tools this year and we've been taking a new order as well. So it's sort of ongoing. So typically, Charles, when we're getting these $25 million to $35 million chunks of business, it's over a 12 to 18-month period of time and I think what we're highlighting here is that we're seeing that type of level activity as they're ramping their production using laser annealing for that one particular customer. Charles Shi Okay. Maybe the second question. The data storage business does appear to have a very good Q2. Is that just some quarterly lumpiness or should we expect the revenue, how should I think about the revenue of data storage going into second half and for the full-year year-on-year growth? How to think about that? John Kiernan Yes, sure, Charles. So I do think, we typically see with high ASPs for our data storage tools, lumpiness from quarter to quarter. The revenue that we achieved in the second quarter was anticipated. Revenue was lower in the first quarter. And I think as we look at the second half of the year, we're expecting sort of an equal quarter in Q3 to Q2, and then, a fall-off in Q4 there, just based upon the scheduled timing of the shipment. So our view for the full year, this year, is that the systems revenue is coming in exactly, scheduled releases of the backlog as planned there. So what we're saying then is for the full year, this year, our expectation is data storage revenue to be up about 5% to 10% if you compare it to last year's volumes. The next question we have is from Dave Duley of Steelhead Securities. Please go ahead. David Duley Hi, thanks for taking my questions. I guess I have a couple of questions. Just take a step back. We've seen really big increases in CapEx from a couple of DRAM guys. I'm sure the third guy is going to join the party. Could you just kind of, in summary, touch upon how that will really help Veeco, or how are you exposed to increases in CapEx from the DRAM guys? Bill Miller Dave, as we've talked a few times, our exposure in DRAM has gone from practically zero a few years ago, and we've now won one customer in LSA for high bandwidth memory. And as John just said, they're now taking equipment from us. We are planning. We're doing Eva demonstrations, excuse me, with the other two DRAM players and our goal is to have a second customer under an evaluation agreement and shipping early in '25, an evaluation system as our kind of next step of landing on the first customer. Now expanding to a second customer with an evaluation system that would probably drive revenue in the 2026 timeframe. The other area we have exposure in high bandwidth memory is in our wet processing business. We are seeing a pretty significant uptick this year in that business really driven from sales to foundry logic people, DRAM makers, as well as some OSATS type applications for HBM. And that's a second leg that we have on the HBM stool. John Kiernan I would say, Bill, we would also comment on. We have two evaluation systems in the field right now for our ion beam deposition technology for low-resistance metals. So there hasn't been any previous revenue in that area but that's an area for future growth for us and an important area for us in DRAM in bringing out ion beam technology that has been traditionally used in our data storage and for the EUV mask blanks market, and bringing out ion beam deposition technology to advanced semiconductor manufacturing for low resistance metal and the first application and the first EVALs are in the DRAM space. David Duley As a follow-on are those low-resistive films used in high-bandwidth memory? Bill Miller They would be beneficial to all memory, but obviously high bandwidth, the lower the resistance, the higher the speed of the device overall. So I would think a first entry wouldn't be unreasonable to think it would be in high bandwidth memory. David Duley Okay, so that's another area that's really kind of driven by this new high. Bill Miller Yes, and if we're successful. Yes, Dave, and if we're successful here, I would expect we'd have follow-on orders in '25 from those ion beam deposition evaluation systems. I had a try. Okay. My final question is a follow-on from Charles earlier is you talked about, hard to stack being up on a year-over-year 5% to 10%. I guess, just thinking going forward at some point or another, would you think that this will start to show some nice uptick from the AI data center consumption and storage? And when would you expect to see incremental orders from an improvement business improvement? Bill Miller I would say, Dave, on the data storage side, our customers are continuing to invest in new technologies, which is positive for the industry. And they still expect long-term exabyte growth CAGR in the 20% to 25% range but utilization at their fabs are still at historically levels, I mean, we are seeing signs of improvement. Our customers are talking about signs of improvement and bringing up additional capacity but I think customers are also signaling right now that they are being cautious about adding additional capacity until utilization rates are higher. So I think as we're sitting here today and we're sort of halfway through this year, based upon the order activity, what we do have visibility into the first half of next year and it looks like our systems business will be lower in the first half of '25 compared to '24, despite the improved utilization for the customers. Thanks, Dave. The next question we have is from Thomas O'Malley of Barclays. Please go ahead. Thomas O'Malley Hi guys, I have a couple here. So the first one is just on China. I think across the semi-cap equipment space you're hearing China hanging in a little stronger for a little longer but when I look at your customer deposits, they've come way down. Bill Miller Could you just talk to there, we had some background noise? So if you don't mind repeating what you were saying there. It wasn't clear to us. Thomas O'Malley Sure thing. Yes, so I was saying across semi-cap equipment prints, you've seen China hanging in stronger for longer. But when I look at your customer deposits, they've come down a bit. Could you talk about what your expectations are in the back half of this year for China? And are you seeing any kind of weakening into the back half of the year, is the first one? Bill Miller So, I would say, Tom, China is playing out as we sort of expected at this point and we've got good visibility into the second half of the year. We said that China would be about a third of our business this year. That's still our expectation. We said that first half would be a bit stronger than second half. We still see that currently. We continue to see investments in new projects by our customer. Activity with the customer is still pretty strong at this point in time. You also asked the question about customer deposits have come down and I wouldn't necessarily say and directly correlate it to any one region, but I would say that typically, for an example, data storage customers have given deposits. We've shipped the backlog in data storage. As I just mentioned, we've had this year in backlog. We're shipping against that backlog, and those deposits have not been replaced at the same pace at this point. Thomas O'Malley Helpful. Then the follow-up is just is you kind of tighten the range on Rev and EPS for the full year. And when I look at least the last couple of years, obviously there were some moving pieces in the broader market that shifted things around but it seems like December is normally a seasonal downtick for you guys. When I look at December this year, the midpoint of your guidance, it looks more flattish. Could you just talk to your expectations around Q4? Any moving parts that kind of get you there? Just because we now have the final quarter and you've narrowed the range. So you've been pretty specific there. Anything that would help us narrow on December? Thank you. Bill Miller Sure. Be happy to. So, Tom. So, yes, we're halfway through the year. We've narrowed the range down. I don't think there's any sort of change in expectation for the year in any material way there. We had initially called first half of the year in this revenue range about $350 million at the midpoint of our guide, and revenue at the midpoint of our guide in the $360 million range for the second half of the year. And as you point out, that's roughly two-quarters of similar type numbers for Q3 and Q4, once you take into consideration our full-year guide and our Q3 guide and year-to-date where we are. So, yes, I would say there's really -- not really much of a change there or anything to highlight. Thanks for the questions. The next question we have is from Gus Richard of Northland Capital. Please go ahead. Gus Richard Yes, thanks for taking my questions. Just on the two-nanometer logic line that you've got some LSA, nanosecond LSA going into, can you talk about the number of steps that you're getting with all around gate and backside power and how that compared to three-nanometer? Bill Miller I would say at both two and three nanometer. Our understanding at the moment is that we have one application step at all the customers and that we are, we did place, did receive some orders this quarter and plan to ship those later this year. Gus Richard Okay. And then you haven't really touched on compound semi, that was weak again in the quarter and I'm just wondering how, silicon carbide's coming along, have you gotten any other traction in power in GaN other than the one evaluation, an established small set type? Bill Miller Yes, we, during the quarter we've made a fair amount of progress in silicon carbide. We are getting, I would say hopefully very close to getting our way to meeting all of the market requirements for silicon carbide and our goal is to place two evaluation systems either end of this year or early in '25 there. That's kind of remained about the same. I would say in GaNon silicon, the update on the 300-millimeter evaluation that you just mentioned is the installation is progressing very well and we're in the midst of turning the tool over to the customer for them to start running their qualification wafers. I think that startup is off to a good start. The next question we have is from Mark Miller of Benchmark. Please go ahead. Mark Miller I'd like to go back and talk about data storage. What do you feel in terms of your customers is their current factory utilization, mid-80s to upper 80s? Bill Miller I'm not sure we should be commenting on their utilization rates, but I will say if you look at what they've said, that their utilization rates were at historically low levels and we definitely saw that in terms of a reduction in our historic service run rate business. We've seen that pick up a bit, but I wouldn't say we're back to historical norms from what we see from a service standpoint. Mark Miller I asked that question because most recently, Seagate Western Digital reported very strong near-line sales that had come up very significantly. So that's why I was curious. Are there any process changes, new materials in terms of the fabrication of thin film head that could lead to opportunities for upgrades or new equipment for you coming down to play? Bill Miller The industry has been working on energy-assisted magnetic recording for some time. As that gets adopted more broadly, it will be an opportunity for us on one hand because the heads are much more complex and there are a lot more deposition and edge steps in the fabrication of the head. And it will also be healthy for the industry because as aerial density grows, it actually helps the industry be cost-competitive against flash memory as well. So I think it's overall a good thing in the long run, just here in the short term, it seems a bit soft. Mark Miller So Seagate is a little ahead of western digital and ramping hammer or even more heads. So you think this plays out in the second half of next year as an opportunity? Bill Miller It's hard for us to see the visibility of that yet. I think we're going to have to wait a little longer to see how successful the industry is with the broader adoption of these energy assisted recording devices. Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to Bill Miller for any closing comments. Bill Miller I'd like to thank our customers and our shareholders, along with the Veeco United team for their continued support in our journey. Have a great evening. That concludes today's conference call. Thank you for joining us. You may now disconnect your lines.

Earnings call: Valens Semiconductor beats revenue guidance in Q2 2024 By Investing.com

Valens Semiconductor (VLN), a leader in high-performance chipsets, has surpassed its revenue projections for the second quarter of 2024, reporting $13.6 million in revenue. The company's GAAP gross margin stood at an impressive 61.4%, although it faced an adjusted EBITDA loss of $5.2 million. Valens' recent acquisition of Acroname, which specializes in automation and control technologies, is set to bolster its footprint in the industrial and audio-video markets. The company's VS6320 chipset is gaining traction in the audio-video market and is anticipated to be a key driver for future revenue growth. Despite some market challenges, Valens Semiconductor remains positive about its long-term prospects, especially with its strategic focus on the machine vision and automotive sectors. In closing, the CEO of Valens Semiconductor thanked the call participants and looked forward to future earnings calls with optimism, signaling confidence in the company's strategic direction and market opportunities. Operator: Good morning. My name is Maya, and I will be your conference operator today. At this time, I would like to welcome everyone to Valen Semiconductors Second Quarter 2024 earnings conference call on webcast. [Operator Instructions]. I will now turn the call over to Lisa Fortuna, Investor Relations for Valens Semiconductor. Please go ahead. Lisa Fortuna: Thank you and welcome everyone to the Valens Semiconductor second quarter 2024 earnings call. With me today are Gideon Ben-Zvi, Chief Executive Officer and Guy Nathanzon, Chief Financial Officer. Earlier today, we issued a press release that is available on the investor relations section of our website under investors.velens.com as a reminder, today's earnings call may include forward looking statements and projections which do not guarantee future events or performance. These statements are subject to the safe harbor language in today's press release. Please refer to our annual report on Form 20F, filed with the SEC on February 28, 2024 for discussion of the factors that could cause actual results to differ materially from those expressed or implied, we do not undertake any duty to revise or update such statements to reflect new information, subsequent events or changes in strategy. We will be discussing certain non-GAAP measures on this call, which we believe are relevant in assessing the financial performance of the business, and you can find reconciliations of these metrics within our earnings release. With that, I'll now turn the call over to Gideon. Gideon Ben-Zvi: Hello, everyone, and thank you for joining Valens Semiconductor's second quarter 2024 earning call. This quarter our team made solid progress executing against our long term strategy and capitalizing on growing market demand for our high performance connectivity solutions. This resulted in revenue exceeding our guidance, increasing our confidence in the positive trends we are seeing across the diverse verticals we serve. In the audio, video market, we continue to see growing interest in an adopting of our latest USB 3 extension technology the VS6320 chipsets. Reflecting this momentum, we entered exciting new partnerships and collaborations in recent months, strengthening our go to market strategy, we believe we are poised to capitalize on the $1 billion annual total addressable market in audio, video connectivity, for video conferencing, machine vision, industrial, medical and other verticals. In addition a recent acquisitions of Acronames, the first M&A transaction of Valens Semiconductor elevates our presence in these verticals. All of these developments occur despite continuous challenges, including slow inventory digestion in the audio video segment despite these short term challenges, our mid and long term opportunities remain promising. Moving on to a quick overview, to our second quarter of financial performance, we are pleased to report that organic revenues exceeded the top end of our guidance at $13.2 million Acroname contributed an additional $0.4 million which increased total revenue to $13.6 million, Acroname was consolidated from May 31 its contribution this quarter represents just one month of revenue. GAAP gross margin of the second quarter came in at 61.4% and adjusted EBITDA loss was $5.2 million both beating our guided ranges. We have a very strong balance sheet with $130.6 million of cash and cash equivalents that allows us to continue investing in innovations and pursuing long term growth opportunities. Moving to Acroname acquisition, I would like to give you more detail about why we're excited about the recent acquisitions of Acroname which we closed on May 31, 2024 based in Boulder, Colorado. Acroname has around 20 employees, most of them are talented engineers. Acroname is pioneering advanced automation and control technologies for applications in industrial robotic control systems and audio video conference rooms, Acroname's, products and solutions will enable us to expand our position in the industrial and audio video market, if they are a leading supplier of high programmable USB hubs, switches and test automation systems for industrial applications. This first M&A transaction, although modest in size, marks a significant milestone in our strategy to support non-organic growth through synergetic acquisitions that will enhance value for our customers and shareholders. Importantly, our strong balance sheet provides us with the flexibility to move quickly when opportunities arise. Going forward, we expect this highly selective acquisition strategy to complement our organic growth initiatives. Now, let me turn our performance and the trends we are seeing in the markets we serve, starting with professional audio video, which includes applications such as entertainment, video conferencing, education and digital signage. Since its introduction late last year, we are proud to have over 50 customers developing products based on the VS6320 with a wide variety of products already launched the public excitement for the chipset validate the VS6320s groundbreaking technology and demonstrates the high demand for reliable, streamlined and affordable connectivity. The industry's eagerness for this chipset was most apparent at the InfoComm International, the largest professional audio video trade show in North America, which took place in mid-June. At the show, many leading manufacturers announced launching products, while other demonstrates the VS6320 embedded into their products, which include USB extenders, PTZ cameras, video bars, wall plates, docking stations, room appliance controllers and USB hub switches. All across the show floor people were praising the new capabilities of the VS6320 chipset. We are pleased to report that we reached mass production of VS6320 chipset in July, and expect to start generating revenues in the second half of 2024 before ramping up further in 2025 there is growing adoption of video conferencing systems driven by hybrid work and education environments, as well as necessary improvements to the user experience despite current market conditions, these positive trends are expected to support mid and long term demand for our chipsets. In addition, during the second quarter, we continue to expand our partnerships with leading providers to accelerate new product introductions. One example is the partnership with Taiwan based Good Way Technology, one of the world's leading PC peripheral design and manufacturing companies, Good Way Technology has leveraged our VS6320 in combination with Synaptics (NASDAQ:SYNA) Display Link Technology to offer the video conferencing market a simplified, flexible and cost effective solution opening the door for the integration of documentation into reasonably priced meeting rooms. As you can see, video conferencing continues to be a major focus for us, and we expect it will be driving factor in the recovery of the entire Pro AV market. We are encouraged by investment that leading tech companies like Microsoft (NASDAQ:MSFT) and Zoom (NASDAQ:ZM) are making. These innovative solutions will improve the user experience through certification processes for video conferencing systems and for the seamless and unified experience in hybrid meetings, we expect that these certifications will drive adoptions of better technologies, which is where we have a significant advantage. Moving on to the machine vision and industrial verticals. To date, Valens has engaged the industrial marketing application, collecting industrial PCs and Remote Touch displays, extending the HDMI and USB enabled remote operation of industrial machines. With the launch of our VS6320, in the VA7000 chipset, we are now entering a much larger market, machine vision. These new chipsets are targeting two main segments in the machine vision world, the IPC based and the embedded vision segments respectively. The IPC based segment is dominated by two standard technologies, GigE Vision and USB3 Vision. Until recently, USB3 Vision offered significantly higher bandwidth, but had limited cable lengths. Now with the Valens USB3 extension solution, USB3 Vision can support the same 100 meter distance as GigE alongside the much needed higher bandwidth. Our new solution enables high resolution machine vision systems such as visual inspection and automated warehouse operations. The embedded vision segment typically leverages proprietary camera extension technologies, Valens V7000 CSI2 extension solution brings significant benefit. It is based on an MIPI A-PHY standard. It enables higher bandwidth extension over long and simpler cables, and most importantly, it is 20 times more robust to electromagnetic interference than competing technologies. Valens is increasing its investment in the industrial machine vision vertical, expanding our partnerships across the ecosystem to enable faster in production through our technology. We believe that the fruits of this effort will be on display during the Vision Show in Stuttgart, Germany on October 8th. Before we discuss automotive I would like to briefly address the current challenges in the audio video markets. We are still experiencing a significant reduction in our audio video revenue compared to last year. We believe this is related to general weakness in the macro economy and to customers continuing to hold high levels of inventory, which dumped new order, replacement and upgrade activity. We remain bullish on the audio, video market in the medium and longer term. We believe we're in a cycle, and that our legacy products will get back to the levels of revenue we used to see in the past. In addition, the VS6320, based products are set to become significant new revenue growth drivers, as well as in the new industry, machine vision vertical. Moving to automotive. Overall, our automotive business is stable. As a reminder, our first generation VA6000 chipsets are used in Mercedes Benz (ETR:MBGn) infotainment and telematics systems, a big part of our focus remains on our second generation chipsets, the VA7000 which complies with the MIPI A-PHY standards. We are progressing in several evaluation processes with global automotive OEMs on this chipset, and customer feedback has been encouraging, and of course, we continue to work with companies across the ecosystem to design and develop products based around this technology. One example of the growth in the A-PHY ecosystem came last month when Continental, one of the largest Tier 1 automotive suppliers in the world, introduced the A-PHY standard into their ADAS camera build. They announced that they have upgraded their SSC-300 camera, which now feature a link speed of up to 8 gigabits, enabling resolution beyond 8 megapixels, they said, and I quote the MIPI A-PHY standard, ensuring the lowest error rate and enhanced EMC (NYSE:EMC_old) robustness, making our cameras resistance to external interference and reliable in various conditions. Continental is the latest in a long list of companies joining the AMA ecosystem and recognizing the many technological benefits this startup offers the automotive industry. We are confident that our innovative technology will position us to take advantage of an enormous opportunity in this automotive segment, which may estimate $4.5 million per annual by 2029 We're optimistic about our technology and potential to meet the wave connectivity solutions. Before I turn over to Guy, I'd like to briefly discuss a trend that crosses the traditional boundary industry, the growth of AI. AI, much of the AI system architecture we know and used today is cloud based, including popular large language models like ChatGPT. However, there is another kind of AI system architecture called EdgeAI, and it's finding new avenues for deployment in implications that require real time operations where the AI processor is separated from the data sensor input. The AI processor must leverage a high performance connectivity solution, specifically one that is uncompressed and error free in order to make accurate decisions. Valens', cost effective and high performance distribution technology is paying an instrumental role in enabling this breakthrough technology in the automotive machine vision and video conferencing industry. With that, I will turn the call to Guy to discuss our financial performance in more detail. Guy Nathanzon: Thank you, Gideon. I'll start with our second quarter 2024 results, and then provide our outlook for the third quarter. We achieved quarterly revenues of $13.6 million exceeding our guidance of between $12.5 million to $13 million our revenue, excluding Acroname, was $13.2 million above the high range of the guidance. This compares to revenues of $24.2 million in the second quarter of 2023 the reduction is related to the inventory digestion cycle of our customers, as explained by Gideon earlier. Audio, video contributed $8.1 million or approximately 60% of total revenues, and automotive contributed $5.5 million or approximately 40% of total revenues this quarter. This compares to audio video revenues of $15.5 million and automotive revenues of $8.7 million representing 64% and 36% of total revenues respectively. In the second quarter of 2023. Second quarter 2024 gross profit was $8.3 million compared to $14.9 million in the second quarter of 2023. Second quarter 2024 gross margin was 61.4% compared to 61.8% in the second quarter of 2023. On a segment basis, our audio video, gross margin was 75.4% and the automotive gross margin was 40.9% compared to 75.3% and 37.8% respectively in the second quarter of 2023 the increase in automotive gross margin was related to cheap cost improvements. Non-GAAP gross margin was 64.5% compared to 63.1% in the second quarter of 2023. Operating expenses in the second quarter of 2024, totaled $17.8 million compared to $20.1 million in the second quarter of 2023. Mainly due to a reduced head count as part of the efficiency plan that was implemented in the second half of 2023. Research and Development expenses accounted for approximately 56% of the second quarter of 2024 operating expenses, coming in at $10 million compared to approximately 61% of the second quarter of 2023 operating expenses, or $12.2 million in the second quarter of 2023. SG&A expenses were $7.8 million compared to $8 million in the second quarter of 2023. The second quarter of 2024 GAAP net loss was $8.9 million versus a net loss of $4.6 million recorded in the second quarter of 2023 and adjusted EBITDA in the second quarter of 2024 was a loss of $5.2 million compared to a loss of $0.8 million in the second quarter of 2023. GAAP loss per share for the second quarter of 2024 was $0.08 compared to GAAP loss per share of $0.05 for the second quarter of 2023. Non-GAAP loss per share in the second quarter of 2024 was $0.04 compared to $0.00 in the second quarter of 2023. The main difference between GAAP and non-GAAP loss per share was due to a stock based compensation, depreciation and amortization. We ended the second quarter of 2024 with a strong balance sheet with cash, cash equivalents and short-term deposits totaling $130.6 million and no debt. This compares $139.8 million at the end of the first quarter of 2024. The reduction is related to ongoing operational expenses and one-time expenses of $7.8 million associated with acquisition. Our working capital at the end of the quarter was $142.3 million compared to $153.3 million at the end of the first quarter of 2024. Our inventory as of June 30, 2024 was $14.1 million of which $2.5 million was from Acroname, excluding this amount inventories were $11.6 million down versus $12.5 million at the end of the first quarter of 2024. We continue to carefully manage our inventory and have effectively reduce them over the last five quarters. Now I would like to provide our guidance for the third quarter. We expect the third quarter revenues to be in the range of $14.7 million to $15.4 million of which $1.2 million to $1.4 million are expected to come from Acroname. We expect gross margin to be in the range of 52% to 53% and we expect adjusted EBITDA loss in the third quarter to be in the range of negative $6.8 million to $6.3 million. Turning to the acquisition of Acroname, as Gideon mentioned, this was our first acquisition. The purchase price was $7.8 million in cash, an additional $1.3 million was transferred to Acroname in consideration for the amount Acroname held in cash at closing. Further, the company will be obligated to pay the sellers earn out payments of up to $7.2 million depending on the achievement of certain revenues, EBITDA and cash flow targets in 2024 and 2025 and the development of a certain product by June 2026. Based on financials provided to the company. Acroname's revenue for the first six months of 2024 was $3.3 million. However, since the closing was on May 31, 2024 we consolidated revenue of $0.4 million in our financial results during the second quarter. I'll now turn the call back to Gideon for his closing remarks before opening the call for Q&A. Gideon Ben-Zvi: Thank you, Guy. Today, we demonstrated how Valens' new offerings not only expand our presence in existing markets, but also enable us to enter AI driven markets, addressing the critical connectivity needs in machine vision, the synergies of our solutions across the various markets we serve continue to prove their value. As we look to the second half of 2024 Valens Semiconductor remains committed to executing our long term growth strategy and capitalizing on the promising opportunities within our target markets. Our innovative, standard setting, high speed connectivity solutions and highly sophisticated chipsets position us to achieve our goals and deliver value for our stakeholders. Our strong balance sheet provides us with flexibility to continue to invest, acquire and innovate, and importantly, to navigate dynamic market conditions. We're also excited to announce that we are planning to host an Investor Day in New York this November, stay tuned for details. Before opening the call for questions, I want to express my gratitude for exceptional team whose hard work, talented dedication are the driving force behind Valens Semiconductor. With that, I will now open to call for your questions. Operator? Operator: [Operator Instructions]. The first question is from Rick Schafer of Oppenheimer. Please go ahead. Unidentified Analyst: Hi. This is [indiscernible] on the line for Rick. Congrats on the results. It looks like you guys delivered outside results to 2Q, and from the guide, it looks like 11% for the third quarter. So you mentioned that you guys started clearing inventory for the last five quarters. So how far are you guys from being inventory bottoming and considering the macro what are you considering in terms of the shape of recovery for the second half of the year, particularly in 4Q? Gideon Ben-Zvi: Before I answer, I want to apologize for the technical problems we all experience today with the provider of the conference call. I apologize sincerely, and just wanted to mention it, and Guy will take the answer for this question. So please Guy. Guy Nathanzon: So in terms of the inventory, we definitely - in the inventory now, in our balance sheet, we still see on the trend of reducing the inventory and in consumption in line with our long term goals, achieving a reasonable number of inventory days. Unidentified Analyst: Okay, great. Thank you. As for my second question, it's on Acroname. It looks like part of the deal requires reaching certain key milestones and metrics and also the development of a new product. How confident are you on reaching those milestones and to the extent that you can any color you could provide on this new development product? Gideon Ben-Zvi: Well, you know in our world, being confident is not an easy thing to deal with. We live in a world of a lot of uncertainty, but it seems that a lot of the good signs are here. And you know that will not provide the very long term forecast. But it seems like that we have the positive signs, but you know, other than that, I feel irresponsible to predict, to give projections. Unidentified Analyst: Thank you. Maybe, if I could squeeze in one last one, the V6320, audio, video product, it seems like, you know, there's a lot of engagement, a lot of partnerships. You guys mentioned 50 or so products. What type of applications do you see first adoption? Are they in traditional conference rooms, huddle rooms. Are you seeing more interest in industrial applications? And when do you start to see these revenues start to contribute? I believe they ran the second half of this year. Is that correct? Gideon Ben-Zvi: Yes. Well, thank you for the question. And actually, I have a bit longer answer for this, and I'm happy you asked it, because I think my answer can put light on this product. You know, in Valens for a long time, and we were playing in the Pro AV world, and the V6320 opens for us first in the world of audio, video more markets, which are more lower end markets such as the huddle room and small and medium sized conference room, where people simply want to have a camera that covers more people, and they would want to use the full USB 3 extension and not to compromise in a USB 2 extension, which will reduce the resolution, reduce the bandwidth and the frame rate, or any other things. So this is the first application. It's the huddle room and make what the Logitech (NASDAQ:LOGI) CEO, who said there are 100 million rooms in the world, that it's clear that in 10 years, all of them will have a solution. And the question is, what's the speed to get there? So this is when looking about the same vertical where we are in, which is the audio, video, moving from the very high end to medium end, not to the low end. We're not a consumer company, but definitely for the medium and less high end than we are, which is far, far larger markets. The second market which you ask about, the industrial it's a very, very big market that today we are aware of quite many millions, actually, just a little bit below 7 million cameras produced every year in this world, and a lot of them need extension. And the reason they are very sensitive to high resolution. It's a world where you need the bandwidth because of several reasons. You need the resolution to inspect. You need the frame rate in order to stop the machine or to act when something happens. And you need the a high depth of many bits per pixel, because you need the sensitivity, because sometimes you need to inspect the color or a change in color. All these are the three components that creates a bandwidth. And this is why industrial market is very demanding for a high bandwidth and this is where we are, and the USB 3 extension is a solution for that. And if I may even say a little bit, speak a little bit more, I would say that's the same as about a medical market, which we are now looking at. I can't elaborate too much, but also in medical, you can imagine that those three parameters are very sensitive, the bandwidth which comes from frame rate, from resolution and from the number of bits per pixel, right? And the last question you asked was about when we already have orders and deliveries in this second half, it looks ramped up nicely yet we are in the semiconductor market, which we always say in Valens that compared to software, the speed is geological. But this is yet we see the ramp up, and we are very happy about it and it reminds us the ramp up when the company started, we never had such a fast ramp up in the product before as one as the such as we have now with V6320. Operator: [Operator Instructions]. There are no further questions at this time. Mr. Ben-Zvi, would you like to make your concluding statements? Gideon Ben-Zvi: Sure. First, I want to thank everyone for the time and for being with us. I want to thank our devoted employees, the talent and the contribution to be where we are and we see you next time in our next earnings call. Thank you very much for your attention, for your support, and we should continue and that's it. All the best and have a good day. Operator: Thank you. This concludes the Valens Semiconductor second quarter 2024 results conference call. Thank you for your participation. You may go ahead and disconnect you.

Earnings call: Icahn Enterprises reports mixed Q2 2024 results By Investing.com

Icahn Enterprises L.P. (IEP) has reported a challenging second quarter in 2024, with CEO Andrew Teno acknowledging a decrease in net asset value and mixed performance across its segments. Despite a decline in the energy segment's EBITDA and reduced consumer spending impacting automotive sales, the company remains confident in its long-term strategy and its ability to improve margins in the service business. The company's balance sheet remains robust with strong liquidity, although the funds experienced a negative return during the quarter. Icahn Enterprises L.P. (IEP) has navigated a challenging landscape, as evident from its recent quarterly performance. The InvestingPro platform offers several insights that could be valuable for investors considering IEP's future prospects: InvestingPro Data highlights a mixed financial picture for IEP. With a market capitalization of $7.22 billion, IEP's negative price-to-earnings (P/E) ratio stands at -14.59, indicating that the market is factoring in potential future earnings growth or a recovery from current unprofitability. The company's revenue has seen a decline of 16.66% in the last twelve months as of Q1 2024, aligning with the management's acknowledgment of reduced consumer spending and other challenges in their segments. On the positive side, IEP's dividend yield is substantial at 25.0%, which is a significant return for income-focused investors. This high yield could be particularly attractive given that IEP has maintained dividend payments for 20 consecutive years, demonstrating a commitment to returning value to shareholders even in tough times. InvestingPro Tips suggest strategic considerations for IEP. The company is expected to see net income growth this year, which could signal a turnaround from the recent performance dip. Moreover, IEP pays a significant dividend to shareholders, reinforcing the company's appeal to those seeking steady income streams. This is supported by the fact that IEP's liquid assets exceed short-term obligations, indicating a solid liquidity position that can support ongoing dividend payments. Investors may also take note that IEP's stock has taken a considerable hit over the last week, trading near its 52-week low. This could represent a potential entry point for value investors, especially with analysts predicting the company will be profitable this year. For a comprehensive view of IEP's performance and additional InvestingPro Tips, interested parties can visit https://www.investing.com/pro/IEP, where 11 more tips are available to guide investment decisions. Operator: Good morning, and welcome to the Icahn Enterprises L.P.'s Second Quarter 2024 Earnings Call with Andrew Teno, President and CEO; Ted Papapostolou, Chief Financial Officer; and Robert Flint, Chief Accounting Officer. I would now like to hand the call over to Robert Flint who will read the opening statements. Please go ahead. Robert Flint: Thank you, operator. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for forward-looking statements we make in this presentation, including statements regarding our future performance and plans for our businesses and potential acquisitions. Forward-looking statements may be identified by words such as expects, anticipates, intends, plans, believes, seeks, estimates, will or words of similar meaning and include but are not limited to statements about the expected future business and financial performance of Icahn Enterprises L.P. and its subsidiaries. Actual events, results and outcomes may differ materially from our expectations due to a variety of known and unknown risks, uncertainties and other factors that are discussed in our filings with the Securities and Exchange Commission, including economic, competitive, legal and other factors. Accordingly, there is no assurance that our expectations will be realized. We assume no obligation to update or revise any forward-looking statements should circumstances change except as otherwise required by law. This presentation also includes certain non-GAAP financial measures including adjusted EBITDA. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the back of this presentation. We also present indicative net asset value. Indicative net asset value includes among other things changes in the fair value of certain subsidiaries, which are not included in our GAAP earnings. All net income and EBITDA amounts we will discuss are attributable to Icahn Enterprises unless otherwise specified. I'll now turn it over to Andrew Teno, our Chief Executive Officer. Andrew Teno: Clearly, the quarter wasn't up to expectations. Between a significant decline in CVI and a few names in our investment segment, NAV went down $969 million from the prior quarter. As we have stated before, our investment returns will be volatile given both the concentration inherent in our portfolio and our activist strategy. We continue to believe our positions will outperform over the longer term. CVI was unfortunately impacted by a fire at Wynnewood that impacted the quarter's profitability. In addition, the entire U.S. refining industry saw cracks decline to more normalized levels. And regional basis detracted further for CVIs refineries. CVI like its small cap peers underperformed our hedge basket which helped offset some, but not all of the decline. More recently, CVI has received good news from litigation regarding small refinery exemptions in the DC Circuit. We hope that this will help reduce the outstanding RIN obligation. Last quarter, we discussed potential strategic actions involving CVI. While CVI is hard at work, we have no updates at this point. The investment portfolio was hurt by performance in a few names, including Bausch, Southwest and Illumina (NASDAQ:ILMN). Our best performers in the quarter were our refining hedges and IFF. We exited our position in Conduent (NASDAQ:CNDT) by adding exposure to Centuri. Regarding the fund's notional exposure, our net short exposure was 16%. Excluding refining hedges, our exposure was net long 13% at quarter end. This compares to net long exposure of 7% as of Q1 excluding the refining hedges. On the automotive side, EBITDA was slightly up as headwinds and topline revenue were offset by cost cutting efforts. We expect that the cost cutting and sourcing initiatives will drive EBITDA improvement in the back half of the year. We continue to make progress in our transformation plan. Our leasing pipeline continues to ramp up and we currently have 25 leases that are signed, but rent has not yet commenced. On the balance sheet, at quarter end, we had $1.5 billion of cash at the holding company and $1.6 billion at the funds. During the quarter, we also refinanced our 2025 notes and our next maturity is in May, 2026. Given our cash position and belief in our investment portfolio, we are comfortable maintaining the $1 distribution for the quarter. I will now hand it over to Ted to discuss the financials in more detail. Ted Papapostolou: Thank you, Andrew. I'll begin by reviewing the performance of our segments and comment on the strength of our balance sheet. Turning to our Investment segment. The funds had a negative return of 8.1% for the quarter, long and other positions had a negative performance attribution of 17.2% while short positions had a positive performance attribution of 9.1%. The holding company's interest in the funds was approximately $2.9 billion as of quarter end. And now to our Energy segment. Energy segments EBITDA was $46 million for Q2 2024 compared to $173 million in Q2 2023. Q2 2024 refining margin per throughput barrel was $10.94 compared to $18.21 in the prior year quarter. This decrease was primarily driven by lower refining margins due to a decrease in crack spreads and reduced throughputs related to a fire at the Wynnewood refinery. Q2 2024 average realized gate prices for UAN decreased by 15% to $268 per ton and ammonia decreased by 26% to $520 per ton when compared to the prior year quarter. CVI declared a second quarter cash dividend of $0.50 per share. Now to our Automotive segment. Q2 2024 net sales and other revenues decreased by $42 million compared to the prior year quarter, primarily driven by reduced consumer spending on automotive repairs and maintenance. These trends are not similar from our industry peers. Adjusted EBITDA improved $2 million for Q2 2024 compared to Q2 2023. Automotive services was able to improve EBITDA through cost cutting and margin initiatives, which offset the reduced car count. And now turning to our all other operating segments. Real estate's Q2 2024 adjusted EBITDA decreased by $1 million compared to the prior year quarter, primarily driven by reduced sales of single-family homes. At one of our country clubs, our single-family home inventory is limited as we are almost sold out in the development while the recently acquired country club is ramping up its development and we are expecting to have sales at the end of 2024 or beginning of 2025. Food Packaging (NYSE:PKG)'s adjusted EBITDA decreased by $5 million for Q2 2024 as compared to the prior year quarter, driven by a weaker mix of business. Although volumes were similar to the prior year period, the mix of business was at lower, less attractive margins. Materials and energy continue to be stable and there are opportunities to improve labor and efficiency at the plants. The management team is working on a capital plan to modernize some of the lines in certain plants, which will greatly enhance efficiency and productivity. Home Fashion's adjusted EBITDA decreased by $1 million as compared to the prior year quarter, mainly driven by lower demand from our international business. During the quarter, we invested in a small strategic acquisition in the UK to grow the hospitality business and to broaden our global footprint. Pharma segments adjusted EBITDA for Q2 2024 improved by $3 million as compared to the prior year quarter, mainly due to higher prescription growth. Vivus U.S. patent exclusivity of Qsymia broadens to two competitors at the end of 2024 and mid-2025, respectively. These two competitors will likely launch generic versions, which will erode product margins. Management has taken actions such as product launches starting in Europe and eventually to other international markets while planning domestic cost cutting initiatives and potential strategic partnerships. Now turning to our liquidity. We maintain liquidity at the holding company and at each of our operating subsidiaries to take advantage of attractive opportunities. As of quarter end, the holding company had cash and investment in the funds of $4.4 billion and our subsidiaries had cash and revolver availability of $1.1 billion. In summary, we continue to focus on building asset value and maintaining liquidity to enable us to capitalize on opportunities within and outside our existing operating segments. Thank you. Operator, can you please open up the call for questions? Operator: Thank you so much. [Operator Instructions] Please stand by for our first question. And it comes from the line of Dan Fannon with Jefferies. Please proceed. Daniel Fannon: Thanks. Good morning. So wanted to just follow-up on the funds and not so much performance for the quarter, which you kind of outlined, but obviously the last week or so has been quite volatile. As you think about the context of how you positioned and/or transitioned the fund with the hedges more macro and some of the changes that you've made, I guess any - I guess additional thoughts given the different backdrop we might be in today versus just a short while ago? Andrew Teno: Hey, Dan. Good morning. So I would say, the markets are volatile. We've been looking at them for quite some time and I'd say the way we're going to try and position ourselves is very much keep our book hedged. And then we have to believe in our longs and believe in our activist strategy, right. So if you look at our significant holdings, the top five that we have listed in the page. Southwest Gas (NYSE:SWX), you have a utility, it should be very stable. Earnings should improve as they bridge their ROE gap. They've had a bit of a hiccup on this Centuri separation, but it is a very good business and one that we think can unlock value over the long run. If you look at AEP, we very much think there's a ROE improvement story. It's got a new CEO who should improve regulatory operations. It's got a fantastic asset base and has a bit of an AI tailwind. If we look at Caesars (NASDAQ:CZR), this is a company that is just about to hit its - CapEx is declining, EBITDA is growing, free cash flow is inflecting. IFF is a business that, even this morning results were I'd say pretty darn good and showing the impact of a new CEO. And if you look at Bausch, obviously it's a complicated situation, but there's a lot of inherent value in BLCO. So a long-winded way of me saying we believe in our longs, we believe our longs have catalysts and we believe our longs will outperform the hedge basket over time. In some of these names, you have easier names to hedge, right? Like giant electric utilities, plenty of those for AEP, others you have to kind of rely more on broad market indexes. Daniel Fannon: Okay. Understood. That's helpful. And just a question on the auto business and trying to understand where you think you are and the kind of turnaround, cost cutting's been a focus, you gave a few stats around leases coming online. But just, I don't know if you want to use a baseball analogy or kind of where we think we are and just in terms of the kind of evolution of that business? Andrew Teno: So if I look at Pep Boys and I think about the service business, EBITDA margins there, whether it's 4% or 4.5%. We look at peers and we think over time, we're talking multi-years, there's no reason that that shouldn't get closer to 10%. There's a lot of moving pieces to that, right. You got to work on that cost cutting efforts. The market has to turn around a bit. I think you look at peers, the industry volumes aren't doing us any favors. And then we have to start clicking on our real estate efforts, right? So we have the leases that are - where you have signed leases that need to commence, and then we've got a bunch of empty boxes we need to fill. So on the empty boxes we need to fill, I'd say, we need to fill. The way that my real estate team explains to me is, we get started, we find the large national retailers who would like to be located next to us who identify, a host of locations could be 2025 that they'd like to occupy. And then we work on one lease and if we can get that across then all of a sudden it should be able to flip into meaningfully more numbers. So I think we're at the point where we've probably done the max amount of work with maybe the least amount to show for it, and I'd hope that over the pending quarters, the results get better and better and reflect that. Operator: Thank you. Our next question comes from the line of Andrew Berg with Post Advisory Group. Andrew Berg: Thanks. Just a quick question with respect to cash at the holding company was down a couple $100 million. Obviously the liquidity across the entity is robust. And I know you guys can have pretty significant swings in the hedge fund on any particular day. But that $200 million, was that moved into the hedge fund and just the movements of other equities in the fund mass. The money going in there or what was the movement for? Andrew Teno: Hey, Andrew. So the big movement to cash the holding company were the payment of two distributions in the quarter. It's just a kind of an odd timing thing where we don't pay out a distribution in the first quarter. We pay out two of them in the second. Andrew Berg: Perfect. Thank you. Operator: One moment for our next question. And it comes from the line of Bruce Monrad with Northeast Investment Management. Bruce Monrad: Hi, everybody. Thanks. Thanks for holding the call. A question if it's okay on Food Packaging. And I see in the slides the reference to softening demand, but I thought I heard you say that units were mostly flat. Is that right? Can you help me on that? Andrew Teno: Yes, the kilometer is flat, but the margins are down. So volume is there, the pricing softened up a bit. And I could give you more context around the quarter. The $5 million of EBITDA drop I mentioned, which is year-over-year on a quarterly basis, it's that same story with the fiber sales that because of the Russian sanctions, we can't repeat that business, and that's about $8 million of topline that was there last year that's not there this year. And that was at a very good margin. The business that replaced that was at a much lower margin, and that's probably - that's one of the main reasons you've seen the comparative drop. Bruce Monrad: Okay. Those sales, is that - Is this sort of like oil shift around, so who is supplying Russia at this moment, so to speak? Andrew Teno: Yes. It's not coming from the EU like it used to in the past. I'm not sure where they're getting that fulfillment. Bruce Monrad: Okay. And a big picture question, if I could. So if I'm thinking from your K, your 10-K, which delineates the margins in Food Packaging, I think North America is the one with the greatest room for improvement. And my question sort of strategically is, do you think that, that would - maybe that geography would benefit from consolidation? Or any comments on that? Andrew Teno: Yes. One thing North America is facing and we mentioned on previous calls is just a high level of waste there. We're battling to get it back to historical levels. And there have been some improvements, but not where it could be. And one of the opportunities there to reduce waste is to modernize our equipment, and management is working on a capital plan to potentially start the process and implement that across many plants, which would begin in the U.S. It's still in the planning stage and early at that, but depending on many factors, it could be very capital intensive. And it could require capital infusion potentially at debt or any combination thereof. But I would say we're still in the outline form of that, and there'll be more to come in the next - probably in the second half of this year. But that is one way we're trying to tackle the waste issue there. Bruce Monrad: Okay. All right. Thank you. Operator: Thank you. As I see no further questions in the queue, I will turn the call back to Andrew Teno for final remarks. Andrew Teno: Thank you very much. So thanks, everyone, for joining. And I'd like to just leave with a reminder that here at Icahn, we are intensely focused on our activism strategy. We have unique advantages, including the Icahn brand name and a long history and willingness to wage proxy contest. It is this track record, which frequently allows us to be invited to join the Board and work cooperatively with them to figure the key changes that will drive shareholder value. Furthermore, given our balance sheet and liquidity, we have the ability to tender for entire businesses, a tool most simply do not possess. Though our returns are lumpy and dissatisfying at times, as we continue to focus on our activist efforts at both our Investment segment and our control businesses, we believe they will bear fruit for all shareholders. We'll speak soon. Bye. Operator: And thank you all for participating in today's conference. You may now disconnect.

Cirrus Logic, Inc. (CRUS) Q1 2025 Earnings Call Transcript

Chelsea Heffernan - Vice President of Investor Relations John Forsyth - Chief Executive Officer Ulf Habermann - Interim Chief Financial Officer Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic First Quarter Fiscal Year 2025 Financial Results Q&A Session. At this time, all participants are in a listen-only mode. After a brief statement, we will open up the call for questions from analysts. Instructions for queuing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the call over to Ms. Chelsea Heffernan, Vice President of Investor Relations. Ms. Heffernan, you may now begin. Chelsea Heffernan Thank you and good afternoon. Joining me on today's call is John Forsyth, Cirrus Logic's President and Chief Executive Officer; and Ulf Habermann, our Interim Chief Financial Officer. Today at approximately 4:00 pm Eastern Time, we announced our financial results for the first quarter fiscal year 2025. A shareholder letter discussing our financial results, the earnings release, and the webcast of this Q&A session are all available at the company's Investor Relations' website. This call will feature questions from the analysts covering our company. Additionally, the results and guidance we discuss on this call will include non-GAAP financial measures that exclude certain items. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in our earnings release, and are all available on the company's Investor Relations' website. Please note that during this session, we may make projections and other forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially from projections. By providing this information, the company expressly disclaims any obligation to update or revise any projections or forward-looking statements, whether as a result of new developments or otherwise. Please refer to the press release in the shareholder letter issued today, which are available on the Cirrus Logic website, and the latest Form 10-K as well as other corporate filings registered with the Securities and Exchange Commission for additional discussion of risk factors that could cause actual results to differ materially from current expectations. Thank you, Chelsea, and welcome to everyone joining today's call. As you've seen in the press release, in the June quarter, Cirrus Logic delivered revenue of $374 million, above the top end of our guidance range due to stronger-than-expected shipments into smartphones. In a moment, I'm going to hand over the call to Ulf to discuss our financial results for the June quarter in greater detail, as well as our outlook for the September quarter. But before we get to that, I would like to make a few remarks regarding our recent progress. Our long-term strategy is based around three broad principles. Number one, maintaining leadership in our core flagship smartphone audio business; number two, continuing our expansion in areas of high-performance mixed signal functionality in smartphones; and number three, leveraging those audio and high-performance mixed signal capabilities to penetrate and grow in new markets. In our flagship smartphone audio business, this past quarter marked a very significant milestone, as we began ramping production of our next-generation custom boosted amplifier and our first 22-nanometer smart codec, ahead of new product launches expected later this year. At Cirrus, we do not innovate in a vacuum, but believe in focusing closely on our customers' needs and aspirations. And both of these products represent significant multiyear development efforts undertaken in close collaboration with our customer. We are excited about the performance, efficiency, and system cost improvements that the new components will deliver. We anticipate that both the boosted amplifier and new smart codec will ship for multiple generations of customer devices following their introduction. As a reference point, over the past six year, the preceding smart codec and boosted amplifier have shipped over 1 billion units and 3.5 billion units, respectively. It takes an extraordinary level of dedication to excellence in both engineering and execution to deliver that kind of accomplishment. And we believe that same dedication can help our new next-generation components have similar success. Looking beyond audio, our goal is to continue to broaden our high-performance mixed-signal content in smartphones, where we see a meaningful opportunity to not only expand our addressable market, but also to grow and diversify our revenue. With new customer introductions that we expect to see later this year, we believe we will benefit from more favorable content in smartphones on the market that include our third-generation camera controller. We also believe there is significant potential to continue to grow value in this area in the future. And we are today investing in a roadmap of further products and features in pursuit of that goal. Beyond camera controllers, we have also previously indicated that we believe advanced power and battery-related technologies represent great opportunities for the company. But today, we have a number of R&D programs underway related to high-efficiency charging, battery management, and system-side power delivery. We believe that the investments we are making in this space today can continue to drive our product diversification in the future. The third element of our strategy is our focus on expanding into new applications and markets outside of smartphones. In this area, we continue to be excited about the opportunities we see in the laptop business. Today, we have design wins with each of the top six laptop OEMs worldwide, and are actively pursuing many future design opportunities across multiple generations of customer products. We see significant customer demand and engagement around our audio codec, boosted amplifier, haptic driver and power converter products, supporting our belief that this is a market where Cirrus Logic can enhance the end-user experience, improve the performance of our customers' products, and increase both content per device and market share over time. Additionally, following the launch of our latest generation of analog-to-digital converters last year, during Q1, we also added a series of new digital-to-analog converters, and an ultrahigh-performance audio codec to this product family. These components offer sustained differentiation with improved performance, lower power consumption, and new feature enhancements. And we have received outstanding customer feedback across professional and prosumer audio segments. And believe they can be valuable contributors to our profitability in the years to come. And with that, let me now turn the call over to Ulf to provide an overview of our financial results, as well as the outlook. Ulf Habermann Thank you, John, and good afternoon everyone. I will start with a summary of our financial results for our fiscal first quarter 2025, and then provide guidance for Q2 FY '25. Revenue in Q1 FY '25 was above the high end of our guidance range at $374 million due to stronger than anticipated shipments into smart phones. On a sequential basis, revenue was relatively flat. On a year-over-year basis, sales were up 18% due to an increase in smartphone unit volumes and HPMS content gains. This was partially offset by lower general market sales. Turning to gross profit and growth margin, non-GAAP gross profit in the quarter was $189.2 million, and non-GAAP gross margin was 50.6%. On a sequential basis, gross margin decreased by 130 basis points mostly driven by higher supply chain costs related to new product ramps. Gross margin increased slightly on a year-over-year basis. Now I'll turn to operating expenses. Non-GAAP operating expense for the first quarter was $118 million. On a sequential basis, OpEx was up $1.5 million primarily due to an increase in employee-related expenses. This was offset by lower product development costs. On a year-over-year basis, operating expense was up $4.2 million largely due to higher variable compensation. Non-GAAP operating income for the quarter was $71.2 million or 19% of revenue. Turning now to taxes, for the June quarter, our non-GAAP tax rate was 23% in line with our previous guidance. And lastly, on the P&L, non-GAAP net income in the first quarter was $62.4 million or $1.12 per share, as the higher revenue and profitability flowed through to the bottom line. We now turn to the balance sheet. Our balance sheet continues to remain strong, and we ended the June quarter with $744.6 million in cash and investments. Our ending cash balance was up $44.6 million from the prior quarter, primarily due to strong cash flow from operations, which was partially offset by stock rate purchases. We continue to have no debt outstanding and have $300 million undrawn on our revolver. Inventory balance at the end of the first quarter was $232.6 million up from $227.2 million in Q4 and FY '24. Days of inventory were down slightly sequentially, and we ended the quarter with approximately 115 days of inventory. Looking ahead in Q2 FY '25, we expect inventory to increase from the prior quarter in support of new smartphone launches expected later this fall. Turning to cash flow, cash flow from operations was $87.2 million in the June quarter and CapEx was roughly $10.1 million, resulting in non-GAAP free cash flow margin for the quarter of roughly 21%. For the 12-month period, cash flow from operations was $548.6 million and CapEx was roughly $36.2 million. This resulted in non-GAAP free cash flow margin of roughly 28%, which is up from 10% for the same 12-month period a year ago. On the share buyback front, in Q1, we utilized $41 million to repurchase approximately 361,000 shares of our common stock at an average price of $113.48. At the end of Q1 FY '25, the company had $274.1 million remaining in its share repurchase authorization. We expect to continue to return capital in the form of stock repurchases, which we believe will provide a long-term benefit to shareholders going forward. Now, onto the guidance, for Q2 of FY '25, we expect revenue in the range of $490 million to $550 million. I would like to take a moment to note that when comparing our September quarter outlook to the equivalent quarter last year, our September quarter this fiscal year begins and ends one week later. Thus, it encompasses one week more of the higher volume production associated typical seasonal product ramps. GAAP gross margin is expected to range from 50% to 52%. Non-GAAP operating expense is expected to range from $125 million to $131 million, up sequentially due to higher variable compensation expense and increased product development cost. We will continue to control discretionary spending while investing strategically in product development to drive long-term growth. We expect our FY '25 non-GAAP tax rate to be approximately 22% to 24% unchanged from our previous guidance. This range is slightly higher than our FY '24 tax rate, which was impacted by a favorable catch-up benefit related to updated IRS guidance on the R&D capitalization rules. In closing, we delivered outstanding results for the June quarter. We are pleased with the progress we have made this year and remain focused on executing on our strategy that we believe will enable the company to grow both revenue and profitability over the long term. Before we begin the Q&A, I would like to note that while we understand there's intense interest related to our largest customer, in accordance with Cirrus Logic company policy, we will not discuss specifics about our business relationship. With that, let me now turn the call over to Chelsea for the Q&A session. Chelsea Heffernan Thank you, Ulf. We will now start the Q&A portion of the earnings call. Please limit yourself to a single question and one follow-up. Thank you. We are now opening the call for question-and-answer session. [Operator Instructions] Our first question comes from Thomas O'Malley from Barclays. Your line is now open. Thomas O'Malley Hey, guys. Thanks for taking my question, and congrats on the really nice results. So, obviously, sensitivity around the largest customer, but some big numbers changes here to the positive side. Could you just talk about, three months ago, going into this cycle there was an expectation for the next several quarters, and clearly things have come in a bit better. On the guidance side, could you talk about where that strength is coming from in your business? That's part one. And then, part two, I wanted to ask on the PC side. You mentioned it again in the script, but could you talk about the opportunities around AI PC and potential incremental content for you guys? You had previously given some targets for the full-year about where you thought the AI -- well, PC in general could go, but maybe any update to that just given what we're hearing on the AI PC front? Thank you. John Forsyth Absolutely. Thank you, Tom. On the guidance side -- well, on the results and the guidance I think, as you know, our goal when we guide is to provide an as accurate a view as we can of what we expect. And we talked about the field teams, we talked about supply chain, we talked about customers, and we look at historical patterns. And we take all that together and use that as inputs to the guidance model. As you've seen in the June quarter, which was also the case in the quarter before, we saw demand which was simply more sustained than it typically has been. And I think that speaks to the strength of demand out there in the real world for our customers' products. So, we're obviously delighted by that, and very pleased with the results. When we look out to the guidance for the September quarter, it obviously embraces, again, all the information we have from the supply chain and our customers. But what we're anticipating building and shipping over the current quarter, the one additional data point that I'd give though when we look to the year-on-year comps for the September quarter guidance is that, this year, our September quarter, our quarters are slightly offset as a consequence of the 53-week year we had last year. So, December was a 14-week quarter, and that means we have this slight offset so that our September quarter ends on September 28 versus September 23, last year, which a week may not sound like a lot but that's right in a peak period of building and shipping for us. It's one of the peak periods during the year. So, that means the September quarter guidance kind of encompasses one week of more intense ramps than it did last year. So, I'd keep that in mind when drawing the year-on-year comparisons there. You also asked about PC market and outlook there. I think we're really delighted with the progress that we're seeing. I think the AI PC upgrade cycle is certainly something that excites us. But the content we have really delivers a lot of benefits across a full spread of PCs across the portfolio, whether or not they're fully focused on AI features. So, I guess -- and in terms of the progress, I've talked in the past about the SAM, what we see as the overall opportunity in the PC space. I've said that's somewhere around $1 billion or more. We still believe that. And then, I've talked about the outlook that we have for FY '25 being in the low tens of millions revenue-wise. We still believe that's appropriate. And then, certainly, I guess, I talk about the momentum that we're seeing. So, we're delighted with the design momentum that we're seeing across customers now and across our range of products. So, we have audio products in the form of boosted amplifier and the codec, we also have haptic drivers and power converter products. And if you take those together across the top five PC laptop OEMs, we believe there's somewhere north of a hundred designs in progress right now which are targeted at shipping in calendar '25. So, we're excited still about the opportunity there and we believe we're tracking really well versus the goals that we set out previously. Our next question is from Tore Svanberg from Stifel. Your line is now open. Unidentified Analyst Yes, good afternoon. This is [Jeremy] (ph) calling for Tore. Just a question on the data converter product, obviously, you have significant experience in the audio and consumer markets, but what is your strategy, in terms of going after industrial applications for this segment? Are there partnerships that you can talk about, maybe relationships, with customers? Anything that you can give us a little bit more color would be great. Thanks. John Forsyth Yes, thanks for asking about this, Jeremy. We really like this part of our business and, believe that the return on investment over the long run is a good one. It's not by comparison, it's not a big units-driven business in any one year, but products tend to run for a long time and at a very, very healthy gross margin and so on. So, one of the things that we've been doing as we've gotten through some major R&D lifts we've had over the past few years, like the 22 nanometer smart codec and so on is deploying some of our Mexico resources on kind of rejuvenating and reenergizing some of those, kind of broad based, analog, catalog products. And especially, not exclusively in the audio space, but especially in the audio space, and that's really key for us. I think audio leadership is part of our heritage. It's also something that gives us a halo that extends to all of our audio products. And these products that we've launched over the past quarter and last year now comprise a suite of digital to analog converters or DACs, ADCs, and the codec, all of which have absolutely uncompromised performance in audio capture and reproduction. So, the customer feedback on those has been stellar. That's across both the prosumer space, and the pro-audio space where we have a great network of relationships, and then, in some other industrial segments and automotive, parts of the automotive market. So, we've seen amazing customer feedback, and we anticipate the end user feedback is going to be equally positive in due course. Unidentified Analyst Great. And maybe just in terms of what timing for revenue, any indication there and maybe which segment you might see first for data converters? Thank you. John Forsyth Yes, we don't break out this part of our business, by revenue. It's really a kind of long, it's part of our kind of long tail business. So, if you look at any given quarter, our customer, our business outside of our largest customer will be maybe 12%, 15%, 20% depending on the particular quarter. That general market business then splits into kind of three categories. So, there is, Android, There's the PC business, which I was talking about, and then there's this, kind of broader based catalog business. So, these products will contribute to that, as I said in a very healthy gross margin. And yes, we'll be sure and give an update on progress as we move forward with this. Our next question comes from Matt Ramsay from TD Cowen. Your line is now open. Matt Ramsay Hey, everybody. Good afternoon. Thank you for taking the questions. John, I mean, this is not new commentary necessarily, but a little bit of different emphasis, I think in your script and in the shareholder letter about, maybe different power domains for HDMS around the battery, and that emphasis has continued to go up. So, maybe I'd appreciate it if you you'd spend a little bit of time there. I know there's a lot of new AI features pretend potentially coming down the pike in phones and in other devices that will, no doubt strain battery life making, I don't know, the usage of the battery and the draining of it and also the charging of it more critical. So, if you could maybe spend a little bit of time to the extent you can, talking about some of those opportunities investments, and then I got a follow-up. Thanks. John Forsyth Thanks. Yes, thank you, Matt. It's certainly true that those are areas where we're making considerable investments, and we believe that there are meaningful opportunities for us. If you think about how we think of our strengths, we believe that leading edge, analog, mixed signal combined with digital, signal processing is kind of sweet spot for us. So, in the power space, we're not really that interested in kind of traditional power management stuff. But we're very interested in areas where we can deliver meaningfully improved performance through the integration of more logic, more digital. And that will tend to mean that you will benefit from being on an advanced node for analog mixed signal, which we typically are. So, that's how we think about it. And what that lends itself to is, certainly stuff around the battery where a lot of sensing and monitoring and then, kind of processing of the information you're getting from the battery, can be extremely valuable both for extending battery life and the impact of battery consumption and peak power consumption on the rest of the system performance. So, we have a bunch of investments around that area. Probably either side of the battery would be a good way of thinking about it. There are multiple ways in which those investments could manifest in terms of products and we'll certainly kind of give more clarity as those come into focus in due course. Matt Ramsay Got it. Thanks, John. I guess as my follow-up, I want to say, hello, Ulf, welcome to the call. I got a couple questions for you. I guess the first one and you guys went through it fairly quickly there, and I got a couple questions of on it tonight. I just want to make sure that I'm crystal clear on so the 14 week quarter was December last year. So, everything that we're looking at for this year, whether it's the September guide or end of December as we push through, is all 13 week quarters. It's just shifted a little bit in timing relative to smartphone ramps. I just wanted to confirm that. And second, everything seems to be playing out as you guys had sort of described it with new versions of the codec and amplifiers coming later this year. As you're getting closer to those ramping, anything that we should think about just collectively about how that might move the gross margin mix? You don't often have all new products on that much content coming in one generation. So, I was just, I don't know, calibrating my model, make sure nothing really moves there with the gross margin mix. Thank you. Ulf Habermann Yes, thanks, Matt. I'm going to jump in and comment on this, though, especially given I gave the comments at the top of the call regarding the offset and the consequences of that 14 week quarter last year. So, you've got it absolutely right. We had a 14 week quarter in December of last year, and that means, couple of things when we get around to comps this year. Firstly, yes, everything is just shifted kind of to the right by a week. So, the September quarter, begins and ends a week later, but that means it embraces a kind of larger proportion of that that peak ramp. So, that's worth keeping in mind when comparing year-over-year. And then, of course, when it gets to the December comps, there is also the fact that that's a 13 week comp compared to a 14 week last year. In addition to which, we obviously had some stuff which we commented on previously about the December quarter last year, which was that we had an unusual case of an Android flagship launching then when it normally hits later in our fiscal year. So, yes, that's the picture. I think you have that absolutely right on what we meant by that comment. On gross margin, I guess we just coming out of a quarter where our gross margin declined by a 130 basis points quarter-on-quarter for reasons that we discussed previously. And we're obviously still quite meaningfully below where we were pre-pandemic, as we went into the pandemic, but as we get into the September quarter, pair our guidance, we do expect a slight improvement relative to what we just reported. Nothing that makes us think differently about our long-term model, to be clear, but there is a slight improvement there, which is reflective of a number of things. Obviously, partly that's product mix, which you alluded to. It's also partly a great deal of work we've been doing on the supply chain side, with our foundry partners, with OSATs and others in order to optimize costs. And that's really been a kind of key feature of our activity as we've seen the pricing environment and the supply environment normalizing that we've been working really hard on driving a more competitive environment in those parts of the supply chain so that we and our customers see some benefit. Thank you. [Operator Instructions] Our next question comes from David Williams from The Benchmark Company. Your line is now open. David Williams Hey, good afternoon. Thanks for taking the question and let me give you my congrats as well for the solid results here. Maybe first just kind of thinking about the success that you've had moving beyond the handset and into the laptop, just kind of curious how you think about some of the other edge type devices as we move kind of push forward further out, automotive and what other areas are we maybe not thinking about where there could be some really nice content opportunity for serious as we expand closer to the edge here? John Forsyth Yes, thank you, David. We certainly think a lot about that. I'm also conscious that, if we talk about that, we'll get into a cycle and giving 13 week updates on stuff that can take quite a while to build. But to your direct question, I think anywhere where audio, power efficiency, haptics can really deliver a benefit to the user experience that would be -- those would be areas that we're seriously evaluating or in the case of, wearables and AR/VR already present in. So, we certainly believe that our opportunity to leverage our audio and HPMS technologies to drive SAM expansion for us goes well beyond the laptop market. It so happens that the laptop market was, or has been a place where there were a number of architectural transitions there which created great entry points for us, and a significant step up in what OEMs wanted to provide to their users in terms of the haptic and the audio/visual experience. So, that's kind of synchronized incredibly well with our product offering. We're very happy with the momentum there, but we're not going to call it quits there. We certainly do have a great deal of interest in expanding into other markets as well. David Williams Great. Good call. Thank you. Then maybe just on the PC side, obviously you have some really great success, but do you think you're seeing maybe an acceleration from the AI PC, just given the additional content and kind of the price point there, but it feels like those are certainly at the upper end more luxury or at the top end of the market. It seems like that could draw in more content. Are you seeing that? And may be any urgency from those OEMs? Thank you. John Forsyth We certainly see a lot of excitement, a lot of urgency, a lot of energy. I alluded to the fact that we believe there's over 100 designs in progress using at least one serious product, in many cases more than one, that are targeted at calendar '25 launches. And obviously, we're building for the period beyond that as well. And we think we're still gathering momentum. So, I think, honestly, a few months ago, I would say that number is ahead of where we would have expected to be. And there does seem to be some degree of kind of re-energization of the PC market in anticipation of the kind of AI-driven cycle, whether that hits, exactly when that hits, I don't think anybody is quite sure and not maybe a 100% sure on what the kind of ultimately compelling user features are going to be, but there's certainly a lot of excitement about the potential for differentiation. Thank you. Our last question comes from Ananda Baruah from Loop Capital. Your line is now open. Unidentified Analyst Hey, guys. It's actually [Alex] (ph) on for Ananda. I have one question. So, my question is, of the content dollar growth that you guys see over the next few years within smartphones, what's a good way to think about the contribution from new or enhanced content relative to smartphone unit growth being the driver of content growth? John Forsyth So, just if I understand the question correctly, we don't make any particularly aggressive assumptions on smartphone units when we're looking at our own growth model internally. Obviously, we also don't guide beyond the current quarter. So, I'm not going to get into what our expectations are over the next year-plus. But what I would say is that, our plan is really always to make sure we've got means of growing in a world where units aren't the primary catalyst for that and we're not dependent on that. So, that's certainly how we think about the business and how we seek to manage it. With that, we'll end the Q&A session. I will now turn the call back to John for his final remarks. John Forsyth Thank you, Chelsea. In summary, Cirrus Logic delivered revenue above the top end of our guidance range for the first quarter and made solid progress across each of the three key areas of our strategy. We remain very excited about the opportunities in front of us, and we thank you for your continued interest in our progress. I'd also like to thank all of our employees worldwide for their incredible dedication and commitment. Before we close, I'd also like to note that we will be participating in Oppenheimer's virtual conference on August 14th. Please check our investor website for the details. Finally, I'd like to thank everyone for participating in our call today. Goodbye. Thank you for attending today's call. You may now disconnect. Have a wonderful day.

Applied Optoelectronics, Inc. (AAOI) Q2 2024 Earnings Call Transcript

Simon Leopold - Raymond James Timothy Savageaux - Northland Capital Markets Dave Kang - B. Riley FBR Good afternoon. I will be your conference operator. At this time, I would like to welcome everyone to Applied Optoelectronics' Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please also note, today's call is being recorded. I would now like to turn the call over to Lindsay Savarese, Investor Relations for AOI. Mrs. Savarese, you may begin. Lindsay Savarese Thank you. I'm Lindsay Savarese, Investor Relations for Applied Optoelectronics. I am pleased to welcome you to AOI's second quarter 2024 financial results conference call. After the market closed today, AOI issued a press release announcing its second quarter 2024 financial results and provided its outlook for the third quarter of 2024. The release is also available on the company's website at ao-inc.com. This call is being recorded and webcast live. A link to the recording can be found on the Investor Relations section of the AOI website and will be archived for one year. Joining us on today's call is Dr. Thompson Lin, AOI's Founder, Chairman and CEO; and Dr. Stefan Murry, AOI's Chief Financial Officer and Chief Strategy Officer. Thompson will give an overview of AOI's Q2 results, and Stefan will provide financial details and the outlook for the third quarter of 2024. A question-and-answer session will follow our prepared remarks. Before we begin, I would like to remind you to review AOI's safe harbor statement. On today's call, management will make forward-looking statements. These forward-looking statements involve risks and uncertainties as well as assumptions and current expectations, which could cause the company's actual results, levels of activity, performance or achievements of the company, or its industry to differ materially from those expressed or implied in such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as believes, forecast, anticipates, estimates, projects, intends, predicts, expects, plans, may, should, could, would, will, potential or things or by the negative of those terms or other similar expressions that convey uncertainty of future events or outcomes. The company has based these forward-looking statements on its current expectations, assumptions, estimates and projections. While the company believes these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond the company's control. Forward-looking statements also include statements regarding management's beliefs and expectations related to the expansion of the reach of our products into new markets and customer responses to our innovation, as well as statements regarding the company's outlook for the third quarter of 2024. Except as required by law, we assume no obligation to update forward-looking statements for any reason after the date of this earnings call to confirm these statements to actual results or to changes in the company's expectations. More information about other risks that may impact the company's business are set forth in the Risk Factors section of the company's reports on file with the SEC, including the company's annual report on Form 10-K and the company's quarterly report on Form 10-Q. Also, all financial results and other financial measures discussed today are on a non-GAAP basis, unless specifically noted otherwise. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation between our GAAP and non-GAAP measures as well as a discussion of why we present non-GAAP financial measures are included in our earnings press release that is available on our website. Before moving to the financial results, I'd like to announce that AOI management will virtually participate at the Rosenblatt 4th Annual Technology Summit- The Age of AI on August 20, and is attending the Jefferies Semi, IT Hardware & Communications Technology Summit on August 28. I'd like to note that the date of our third quarter 2024 earnings call is currently scheduled for November 7, 2024. Now, I would like to turn the call over to Dr. Thompson Lin, Applied Optoelectronics' Founder, Chairman and CEO. Thompson? Thompson Lin Thank you, Lindsay, and thank you for joining our call today. Our revenue for the second quarter was in line with our expectations. While our non-GAAP gross margin came in below our expectations, primarily due to product mix, our non-GAAP loss per share was favorable compared to our expectations. During the second quarter, we delivered a revenue of $43.3 million, which was within our guidance range of $41.5 million to $46.5 million. We delivered non-GAAP gross margin of 22.5%, which was below our guidance range of 25.5% to 27.5%. Our non-GAAP loss per share was $0.28, which was favorable compared to our guidance range of loss of $0.29 to $0.35 per share. Our revenue for our data center product of $34.4 million was up 25% year-over-year and 19% sequentially. Revenue for our 100G products increased 21% year-over-year and revenue for our 400G products more than double in the same period. We are pleased to report that we have begun to receive initial order for 400G products from a larger - large hyper-scale customer, and we are very excited about this new customer interaction. With this new customer, we now are shipping 400G products to three out of the five largest hyper-scale data center customers in the U.S. Total revenue in our CATV segment was $5.8 million, which was down 38% year-over-year and 33% sequentially largely driven by continued generally slow sales of DOCSIS 3.1 equipment. As the industry prepares to transition to DOCSIS 4.0, we believe that this transition is underway and expect our [CATV 6] to begin to ramp in Q3. With that, I'll turn the call over to Stefan to review the details of our Q2 performance and our outlook for Q3. Stefan? As Thompson mentioned, our revenue for the second quarter was in line with our expectations. While our non-GAAP gross margin came in below our expectations largely due to product mix, our non-GAAP loss per share was favorable compared to our expectations. As a reminder, on our Q1 call, we discussed a number of key reasons why we felt optimistic about the second half of the year despite a slow start to 2024. Today, we're pleased to report that we have executed on many of these initiatives that we believe will position the company for long-term success and continue to give us optimism for the second half of the year and beyond. As Thompson mentioned earlier, we've begun to receive orders for 400G products from another large hyper-scale customer, and we expect to ship these initial orders in Q3. While the initial orders are relatively small, we are very excited about this new customer interaction. With this new customer, we are now shipping 400G products to three out of the five largest hyper-scale data center customers in the U.S. We previously discussed on our Q1 call how we had begun to receive forecasted orders for the VCSEL-based 400G active optical cables, for which Microsoft provided development funding last year. As demonstrated by our Q2 datacenter results, we have started to see business improvements and expect to see continued improvement throughout the year. While the initial ramp has been slower than originally anticipated, recent forecasts indicate a substantial improvement in revenue in late Q3 and into Q4 and beyond. We anticipate that this will represent a longer-term, sustainable increase in business and are excited for this product to finally transition to wider usage within our customers' datacenters. Lastly, in our CATV business, we have finalized the qualification testing with three out of the four individual 1.8 gigahertz amplifier models with one of our major MSO customers. The testing has gone well, and we have begun to negotiate our first orders for these new amplifiers and expect our CATV results to improve markedly in Q3 as a result. Turning to the quarter. Our total revenue for the second quarter was $43.3 million, which was up 4% year-over-year and 6% sequentially and which was in line with our guidance range of $41.5 million to $46.5 million. During the second quarter, 79% of our revenue was from our datacenter products, 13% was from our CATV products, with the remaining 8% from FTTH, telecom and other. In our datacenter business, our Q2 datacenter revenue came in at $34.4 million, which increased 25% year-over-year and 19% sequentially. In the second quarter, 73% of our data center revenue was from our 100G products, 18% was from our 200G and 400G transceiver products and 7% was from our 40G transceiver products. As we have discussed on several prior earnings calls, we signed two agreements with Microsoft in 2023 for the development of 400G products and beyond. This included a development program to make next-generation lasers for its datacenters and for the development of its 400G and next-generation active optical cables. While not guaranteed, we continue to believe that the revenue opportunity for our 400G and 800G products could be greater and a longer duration than the revenue contribution we saw from this customer during the peak of the 40G product cycle, which suggests that revenue from these products may exceed $300 million over the several years of these buildouts. In Q2, we began to see some business improvement, and we believe that this business will continue to ramp in Q3 and Q4. As our datacenter customers work on building out their next-generation, AI-focused data center architectures, we have been very active in our 800G qualification efforts with several hyperscale customers. We believe that orders for 800G products will begin for us in Q4 of this year, with a ramp from that point. Turning to our CATV business. CATV revenue in the second quarter was $5.8 million, which was down 38% year-over-year and down 33% sequentially, largely driven by generally slow sales of DOCSIS 3.1 equipment as the industry transitions to DOCSIS 4.0. With the encouraging results from our customer qualification and our new 1.8 gigahertz amplifier products, we expect significant improvement in our CATV business starting in Q3, with an additional ramp in Q4 and into 2025, as we believe customer upgrades to their networks will begin in earnest. Now turning to our telecom segment. Revenue from our telecom products of $2.4 million was down 44% year-over-year and up 5% sequentially, largely driven by ongoing softness in 5G demand, particularly in China. Looking ahead, we continue to expect telecom sales to fluctuate from quarter-to-quarter. For the second quarter, our top 10 customers represented 94% of revenue, up from 88% in Q2 of last year. We had three greater than 10% customers, two, in the data center market, which contributed 60% and 16% of our total revenue, respectively; and one in the CATV market, which contributed 12% of our total revenue. In Q2, we generated non-GAAP gross margin of 22.5%, which was below our guidance range of 25.5% to 27.5% and was up from 18.9% in Q1 of 2024 and down from 24.8% in Q2 of 2023. The decrease in gross margin was driven mainly by product mix. Looking ahead, we expect continued improvement in gross margins throughout the year as product mix improves in our datacenter business and as our CATV business begins to ramp. We remain committed to our long-term goal of returning our non-GAAP gross margin to around 40% and believe that this goal is achievable. Total non-GAAP operating expenses in the second quarter were $26 million or 60% of revenue, which compared to $19 million or 46% of revenue in Q2 of the prior year due to higher R&D spend to improve time to market for our 800G and 1.6 terabit data center products. Looking ahead, we continue to expect non-GAAP operating expenses to range from $24 million to $26 million per quarter to account for the acceleration of R&D expenses. Non-GAAP operating loss in the second quarter was $16.2 million compared to an operating loss of $8.7 million in Q2 in the prior year. GAAP net loss for Q2 was $26.1 million or a loss of $0.66 per basic share compared with a GAAP net loss of $16.9 million or a loss of $0.57 per basic share in Q2 of 2023. On a non-GAAP basis, net loss for Q2 was $10.9 million or $0.28 per share, which was favorable to our guidance range of a loss of $11.6 million to $13.5 million or a loss per share in the range of $0.29 to $0.34 per basic share. This compares to a non-GAAP net loss of $6.1 million or a loss of $0.21 per basic share in Q2 of the prior year. The fully diluted shares outstanding used for computing the earnings per share in Q2 were $39.4 million. Turning now to the balance sheet. We ended the second quarter with $16.1 million in total cash, cash equivalents, short-term investments and restricted cash. This compares with $17.4 million at the end of the first quarter. As was the case last quarter, we had significant cash collections that came in shortly after the end of the quarter, including roughly $15 million in collections within the two-week period following the end of the quarter. During the quarter, we also used some cash to pay down debt in order to control our interest expense. We ended the quarter with total debt, excluding convertible debt of $27.5 million, compared to $34.8 million at the end of last quarter. As of June 30, we had $54.3 million in inventory, which was flat compared to $54.3 million at the end of Q1. We made a total of $4 million in capital investments in the second quarter, which was mainly used for production and R&D equipment. Moving now to our Q3 outlook. We expect Q3 revenue to be between $60 million and $66 million and non-GAAP gross margin to be in the range of 24% to 26%. Non-GAAP net loss is expected to be in the range of $5.9 million to $8.6 million and non-GAAP loss per share between $0.14 per basic share and $0.20 per basic share, using a weighted average basic share count of approximately 43.2 million shares. The gross margin in Q3 is somewhat lower than what we had earlier anticipated, mainly due to additional costs that we expect to incur due to the rapid ramp of our 1.8 gigahertz CATV products in the quarter. We believe the gross margin will expand for these products in Q4 as we gain efficiency and economies of scale in our manufacturing process for these new products. Looking ahead, we continue to be optimistic about the long-term demand drivers for both our data center and CATV businesses and that we are well positioned to benefit from these growing trends. At the midpoint of our third quarter guidance range, we are projecting in excess of 45% revenue growth sequentially. While we are not yet in a position to provide guidance for Q4, we believe that this growth rate will accelerate from Q3 to Q4, benefiting from the tailwinds driven by the adoption of generative AI, which we continue to believe will require our datacenter customers to deploy more infrastructure, including more optical interconnect. Due to our U.S.-based production ability and our automated manufacturing capabilities and experience, we believe we are uniquely positioned to help our customers meet the significant demand. Also, we believe that we are very well positioned with the right team, product portfolio and strategy in place as our CATV customers transition to next-generation architecture and implement new technologies like DOCSIS 4.0. With that, I will turn it back over to the operator for the Q&A session. Operator? Thank you. [Operator Instructions] And today's first question comes from Simon Leopold with Raymond James. Please go ahead. Simon Leopold Great. Thank you for taking the questions. I've got a handful. Let me start out with on this - the new hyperscale win, which sounds nice, and I guess something you guys have been shooting for a bit. Can you give us a little bit more color on the nature of this award? Is this another AOC type of device, or any kind of color you can give us on the contents of what you're selling to this - in this new project? Then I've got a follow-up on the CATV segment? Stefan Murry Yes. I mean, for confidentiality reasons, I really can't disclose too much about it, but it's a product that's more in line with our standard data center type transceiver product, and it is a 400 gig product. And then a single mold. Thank you. On the CATV side, I kind of thought we were bottoming last quarter, so a little bit surprised, but everything suggests that the ramp of DOCSIS 4.0 is still coming, maybe just slower than we once expected. So, I'm wondering if you could level set us in terms of, how you expect that product segment to develop, and maybe this is a little bit of an artificial metric, but I'm just trying to figure out where do we kind of get back to maybe a $25 million quarterly run rate? Is that a second half '25 event, or can that happen earlier than that? Any kind of guidance you could give us around the timing of the CATV ramp would help? Stefan Murry Well, as we said in our prepared remarks, I expect a substantial improvement in CATV revenue in Q3. So I expect we'll be back at a $25 million number before the end of the year, on that range. The challenge that we have right now, as we noted in the Cable TV section, is really on the gross margin in Q3, based on the guide. What we expected was Cable TV gross margin to come in, significantly higher than our data center business. And in Q3, we had some cost overruns and things, as we start to ramp this product. So, we're expecting that gross margin to not be, where we wanted to ultimately settle out. So for us, the excitement in Q3 around the revenue ramp in CATV is real. It's a little bit muted, because of the additional expenses that we're incurring, but those are temporary. Simon Leopold Great. And just the last one, hopefully easy. The share count is jumping in the guidance for the third quarter. Could you just help explain that? Thank you. Stefan Murry Yes, I mean, it's a combination of stock grants that have already been made, and some provision for additional issuance of shares. Thank you. [Operator Instructions] Our next question comes from Tim Savageaux with Northland Capital Markets. Please go ahead. Timothy Savageaux Hi, good afternoon, and congrats on the outlook in particular and the new win. Just to go back on, well, kind of the guidance, I guess, it sounds like based on your answer to the last question, maybe as we look into this solid increase with Q4, the expected seller rate, sorry, Q3, the expected seller rate into Q4, seems like maybe it's 50-50, data center and cable. But any more color on - for this $20 million sequential increase you're looking for, is that about right and thinking about where it's coming from? And then, I will follow-up? Stefan Murry In Q3, more of the additional revenue is coming from cable than data center. And in Q4, the opposite we think will be true. That is data center will outgrow Cable TV and a dollar base in Q4 sequentially. Timothy Savageaux It sure did, and that's super helpful. And then, just on the quarter, you had a new 10% customer pop up in data center, I assume not a new customer. And it looks like Microsoft is pretty flat from an absolute dollar standpoint, but you did see an increase in 100 gig. So should we assume that one of the maybe not hyperscale, but big kind of internal, I guess we're in data centers for internal capabilities, you've had a few of those guys, not necessarily internal, but associated with the business. I can think of a few names that, might fit that bill and doing a lot of AI investing, and maybe pulling along 100 gig or any more color on that new customer joining the list there? Stefan Murry No, the customer that popped up above 10%, it has been a customer for a while, but that's not the new customer that we were referring to. However, it is another hyperscale customer. And they're predominantly buying 400 gig, not 100 gig. And they're doing that, because they're aggressively building out their AI infrastructure as well. The customers up on a revenue basis, they've grown almost 4x since Q1 in terms of their purchasing. Timothy Savageaux Great, awesome color, but that's not the new hyperscaler that you're referencing. Or is it? It's not. Okay. And I guess last question started parse semantic so much here, but you mentioned the newer 400 gig customer. I think Thompson referred to that as a new customer, but is it better referred to as a historical customer that's come back, or this is a net new customer for applied offer? Stefan Murry So, we would classify a customer that hasn't stayed done business with us in a while, two years or something as a new customer, because it really is a new interaction for us. I guess the last one was on, I hear you on the gross margin with the ramp in Q3 and the pressure coming out of cable. And you've given not guidance, but at least some directional idea on Q4 for revenue. Do you think, and maybe you said this, do you think you'll be able to resolve some of those gross margin issues in cable and Q4 to drive gross margin types? That's it from me? Stefan Murry Yes, I think a lot of the extra costs that we're incurring in the production are really Q3. I think by Q4 we'll have most of that recovered. It may take us another quarter to get entirely back to where we expected to settle out longer-term, which would be circa 40%, maybe a little bit higher. So I think the bulk of the extra expense will be resolved by Q4. That's driving gross margin. Thank you. [Operator Instructions] Our next question comes from Dave Kang with B. Riley FBR. Please go ahead. Dave Kang Yes, thank you. First question is just a follow-up on Tim's question about third quarter as well as fourth quarter for that matter. You expect data com, to drive strong growth, especially in fourth quarter. Just can you provide a little bit more color, more flavor, you know, whether it's 100 gig, 400 gig, 800 gig, any additional color would be appreciated? Stefan Murry Sure, it's expected to be mostly 400 gig and some contribution from 800 gig in Q4. Got it. And then just Microsoft AOC program sounds like starting to ramp. And you're still sticking with $300 million, because I'm wondering if you think maybe by exiting at what level to give us some comfort, maybe you can do $100 million next year. I mean, you think you can do $20 million, $25 million exiting this year? Or what, I guess, what are they forecasting? Stefan Murry I mean, I think it remains to be seen. I think it would be tough to get all the way up to $25 million, let's say, in Q4. Things as we noted in our prepared remarks earlier, things in that project have gotten off to a slower start than what we had expected. They are starting to ramp, however, so, you know, we're still sticking with that $300 million aggregate number. Just a little bit later to get started than we expected. Dave Kang Got it. And then on 800 gig in our previous meeting, you talked about two hyperscalers ramping in third quarter. Now I think you said in the prepared remarks, now it's pushed the fourth quarter. Did I hear that correctly? And are we talking about - same hyperscalers or different customers? Stefan Murry Yes. I remember correctly, the commentary you had was that - we would expect 800 gig sales for one or two hyperscale customers in late Q3 or early Q4. And that's pretty consistent with what we're seeing now. There are scenarios where we could literally get some orders in Q3, but I think if you saw enough that I'm more comfortable putting into the Q4 thing. But it's not a dramatic change from what we had talked about it. Dave Kang And my last question is on gross margin. I think you said the long-term target is 40%. Are we talking like the second half of next year? And if so, what kind of volume would you require for you to hit your target? Stefan Murry It's not as much about volume as it is about product mix. Dave, that's what we were talking about earlier. I mean the products that we have in our portfolio will have in our portfolio within the next year or so, have gross margins that range from in excess of 40% to somewhere in the low 20s. And actually, there's probably a few products that are even below that. But in terms of the major products, so it's the mix between those products. And in particular, the cable TV products generally come in, especially the DOCSIS 4.0 products are going to come in at a higher gross margin towards that upper end of the range that I mentioned a minute ago. And some of the 800 gig products will come in at pretty high gross margins as well. And the third factor that's going to drive the gross margins up, is the shift in 400 gig from predominantly multi-mode optics to single mode optics. So, we've seen some customer interest in particular, some of the new customer interactions that we talked about earlier. Those have been for single mode for 400 gig optics, which are significantly more expensive and have better gross margin than the multimode optics. So all three of those things are what will combine to drive gross margin up. Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the call back over to Dr. Thompson Lin for closing remarks. Thompson Lin Okay. Thank you for joining us today. As always, we want to extend a thank you to our investors, customers and employees for your continued support, as we discussed today, we believe the long-term demand drivers remain strong for both our datacenter and CATV business, and we believe we are well positioned to capitalize on these opportunities. Thank you. Thank you, Dr. Lin. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful evening.

Earnings call: R1 RCM Inc. navigates cyberattack, posts solid Q2 results By Investing.com

R1 RCM Inc . (NASDAQ:RCM) has reported a resilient second quarter in 2024 with $627.9 million in revenue and adjusted EBITDA of $156.1 million, despite facing challenges from cyberattacks on Change Healthcare (NASDAQ:CHNG) and Ascension. The company, which works with over 90 of the top 100 health systems, has shown strong operational execution and growth, aided by its technology platform and global scale. The integration of Acclara into R1 RCM's operations is on track, and the company has effectively addressed the Ascension cyberattack, expecting a return to normalcy soon. Although the cyberattack had a financial impact, with an estimated revenue delay of $75 million to $95 million, the company's cash position remains strong at $163 million. However, R1 RCM will not issue guidance for the year 2024 due to a pending transaction. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights InvestingPro Insights R1 RCM's recent performance has been a mixed bag, but certain metrics and market movements suggest a nuanced picture. Here are some insights based on the latest data from InvestingPro: InvestingPro Data indicates a market capitalization of $5.89 billion, signaling a substantial size within its sector. Despite not being profitable over the last twelve months, analysts on InvestingPro predict that the company will turn a profit this year. This anticipation of profitability is a significant factor for potential investors considering the company's future prospects. The company's revenue growth has been steady, with a 17.61% increase over the last twelve months as of Q1 2024. This growth is reflective of the company's operational execution and could be a positive sign for investors looking for expanding companies. InvestingPro Tips highlight a significant return over the last week, with a 8.46% increase, and an even more impressive 27.58% surge over the past month. These figures suggest that the market is responding favorably to R1 RCM's recent developments and operational resilience. For readers interested in a deeper dive into R1 RCM's financials and future outlook, InvestingPro offers additional tips. As of now, there are 8 more InvestingPro Tips available, which can provide further insights into the company's performance and potential investment value. For more detailed analysis and additional tips, investors can refer to InvestingPro's full suite of metrics and expert commentary at: https://www.investing.com/pro/RCM Full transcript - R1 RCM Inc (RCM) Q2 2024: Operator: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2024 R1 RCM Inc. Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Evan Smith. Please go ahead. Evan Smith: Thank you, operator. Certain statements made during this call may be considered forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, any statements about our future growth plans and performance statements about the impacts of recent cyberattacks, including the Change Healthcare and Ascension cyberattacks on our business and financial results, our strategic and cost-saving initiatives, our liquidity position, our integration, our growth opportunities, our future financial performance are forward-looking statements. These statements are often identified by the use of words such as anticipate, believe, estimate, intend, design, may, plan, project, would and similar expressions or variations. Investors are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements made on today's call involve risks and uncertainties. While we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. Our actual results and outcomes may differ materially from those included in these forward-looking statements as a result of various factors, including but not limited to, the completion of the take-private transaction announced on August 1, 2024, on anticipated terms and timing or at all; breaches or failures of our vendors' information security measures or unauthorized access to a customer's data; disruptions in or damages to our global business service centers, third-party operated data centers or other services provided by other third parties economic downturns and market conditions beyond our control, including high inflation; the quality of global financial markets our ability to timely and successfully achieve the anticipated benefits and potential synergies of the acquisitions of Cloudmed and Acclara; our ability to retain existing customers or acquire new customers; the development of markets for our revenue cycle management offering; variability in the lead time of prospective customers; delayed or unsuccessful implementation of our technologies, including AI; competition with the market and the factors discussed under the heading Risk Factors in our most recent annual report on Form 10-K. Certain results will be referenced on this call may be rounded to the nearest whole number. We will also be referencing non-GAAP metrics on this call. For reconciliation of non-GAAP metrics to the most closely comparable GAAP metrics, please refer to our press release. As a reminder, last week, we announced the execution of the definitive agreement with TowerBrook and CD&R, where the two firms will acquire all the outstanding common stock of the company that TowerBrook does not currently own. In light of the pending transaction, we are not providing guidance for 2024 or taking questions following our prepared remarks. Now let me turn the call over to Lee. Lee, go ahead. Lee Rivas: Thank you, Evan, and good morning, everyone. As indicated in our press release, we delivered strong operational results and continue to advance our technology transformation, while addressing the impacts resulting from the cyberattack on one of our largest customers as well as the Change Healthcare outage. Underlying business trends are positive, resulting in approximately $628 million in revenue and $156 million in adjusted EBITDA for the second quarter. Before I provide more detail on our progress in the quarter, I want to reinforce our commitment and belief in our position in a growing industry and our strategy to be the platform of choice for providers. We operate with the most scale of any technology and service provider in our space. We currently serve over 90 of the top 100 health systems and over 500 customers. The breadth of data we access, the power of our technology platform and our unmatched global scale enables our teams to deliver best-in-class unit economics, increased revenue yields and improved patient satisfaction, which are the main value drivers for our customers. As evidenced by response to recent events, the company demonstrated its significant operational agility and scale, the ability to drive rapid deployment of high-impact technologies and our close collaborative relationships with our customer organizations. We believe our customer-centric approach and continued innovation around Gen AI will keep R1 at the forefront of the industry and support our continued growth. Now let me shift to execution on our priorities through the first half of the year. First, operational execution. First, let me cover the onboarding of our largest new end-to-end customer. The customer's leadership team has been very supportive to execute a seamless transition to R1. I am pleased to report that we successfully completed the onboarding of over 1,900 associates over the last several weeks and are on track to begin ramping revenue in the second half of the year. These team members are continuing to perform outstanding work implementing our technology. We are using an onboarding playbook that has been successful with our other large acute customers, which gives us confidence in our ability to achieve the operational and financial objectives we stated for this contract. The integration of Acclara continues to progress. We are impressed with the team as we continue to advance opportunities to integrate the business into our existing offerings. We believe we are at or ahead of our integration time line, and we remain confident in our ability to achieve our stated synergy objectives. While focused on the integration, we also have a disciplined approach to our commercial strategy and are actively meeting with the Acclara customer base, which we believe will provide additional cross-selling opportunities to support our growth going forward. Last, I want to provide some color surrounding R1's operations related to the Ascension cyberattack announced in early May. Given we are deeply embedded across Ascension's revenue cycle operations, our operating and technology teams mobilized quickly. Our priority from the outset has been patient safety and care continuity, combined with the security of R1 systems. After disconnecting from the systems, we implemented downtime procedures across all functions during the outage. These manual processes have resulted in hundreds of thousands of paper registrations and corresponding clinical records, which need to be loaded into the electronic systems. We are happy to report that we have reconnected past systems, and we expect to gradually resume normal operations over the coming weeks. We have brought in additional resources to assist in backlog resolution, including scanning paper documentation, coding outstanding claims and cash posting. These additional costs began in the second quarter and are expected to continue throughout the remainder of the year. We believe our dedicated approach to operational continuity and recover in support of our customers bolsters our position as the leading revenue cycle partner in the industry. Now let me move to our second priority, growth. We continue to execute on our growth plan, including new modular bookings and expanding new opportunities in our end-to-end pipeline. The end-to-end pipeline consists of a diverse selection of mid- to large-sized health systems who have engaged deeply with our commercial teams to explore partnership opportunities. In addition to adding to our 500-plus customer base, we continue to have success cross-selling within our core customer base. A notable example this quarter included an expansion with a long-standing transfer DRG validation customer. During the quarter, we added charge capture and underpayment solutions, which are anticipated to add several million dollars in additional annual revenue. We are also gaining traction with our functional model through successful onboardings, new bookings and continued interest in this solution. Last quarter, we mentioned an expansion with a $400 million NPR regional hospital for inpatient clinical denials, and that we were in discussions for additional opportunities, including a managed service or functional partnership deal for our CDI Total Performance solution offering. During the quarter, we expanded this relationship by signing the CDI functional partnership and adding coding and denials management -- modular solutions. We believe this example demonstrates the long runway for growth within our core base, and we are in discussions to further expand this relationship to include three additional modular solutions. Finally, we are executing on our technology road map. In June, Steve Albert and Brian Gambs, our Chief Product and Chief Technology Officers shared top priorities with investors, which includes further development of our platform, AI and automation as well as new solution innovation. With access to a large-scale data ecosystem, technology remains a cornerstone of our strategy, which we believe will enable R1 to drive down costs, improve revenue yield and enable patient satisfaction. First, our platform is the foundation for how we are able to drive operational efficiencies and increase user satisfaction for our employee base while also improving customer results. You heard the team discuss our modernization efforts, which started with our cloud migration. We believe these infrastructure improvements allow us to scale with a high degree of reliability, which is increasingly important given our data ecosystem. Second, our use of advanced technologies, including Generative AI and Intelligent Automation continues to transform many aspects of work performed by our associates. We are focused on AI assistance, AI-infused task automation and enhanced self-service. Last quarter, you heard us discuss our automated clinical appeals application, which assists our clinical experts by reading medical records for clinically denied claims and then drafting an appeal. This reduced this time spent by our team members by 75% from one hour down to 15 minutes. In addition, we continually add task automation to some of the most complex problems in revenue cycles, such as prior auth. We believe this multistep process has the potential to save providers up to $20 billion annually in the long term by preventing care delays and reducing the time spent for requests. Lastly, we continue to leverage our data, scale and expertise to develop new products and ways to serve our customers. Recent examples include insurance discovery, modular coding and patient receivable solutions, each of which enables lower cost and expands revenue for our providers. Our commercial team has started discussing these solutions with providers, and we anticipate our results to further assist in future bookings and revenue growth for R1. In summary, we believe our vision to be the automation platform of choice for the provider industry is clear and achievable. Our strategy to meet providers where they are in their needs today matches a large and growing market, and we expect will help us continue to grow and further diversify our business. Lastly, our value proposition to the provider industry is strong, combining technology, global scale and the best people in the industry. Thank you. And with that, I'll turn the call over to Jennifer to discuss our quarterly financials. Jennifer Williams: Thank you, Lee, and good morning, everyone. Our second quarter financial results continue to demonstrate the strength of our underlying business and the progress we are making against our financial objectives. Despite the impact of recent disruptions related to both Change Healthcare and Ascension outages, our underlying business continues to perform ahead of our expectations. We delivered solid results in the second quarter with revenue of $627.9 million and adjusted EBITDA of $156.1 million, demonstrating our continued cost discipline as well as operational and technology-driven initiatives to further enhance our global capabilities and infrastructure. Total revenue grew by 12% year-over-year, primarily driven by the contribution of Acclara and continued growth in our Modular business. This was partially offset by our previously disclosed customer attrition in our physician customer base and impact of facility divestitures. Net operating fees of $374.6 million grew approximately 5% or $16.8 million year-over-year. This was primarily driven by the contribution of Acclara as well as slightly better-than-expected volumes in our enterprise customer base. This was partially offset by the previously mentioned attrition and divestitures. Incentive fees were $21.7 million. This was slightly below our expectations, primarily due to a $4 million impact related to the outages. This incident negatively impacted balance sheet metrics related to cash and A/R measured at the end of the quarter. Our Modular and Other revenue of $231.6 million grew by 35% or approximately $60 million year-over-year, primarily driven by the addition of Acclara revenues as well as continued growth in our Modular business from the expansion of services to existing customers and new customer contracts. Turning to expenses for the quarter. Non-GAAP cost of services in Q2 was approximately $421 million, up roughly $57 million year-over-year, primarily related to the inclusion of Acclara. Excluding the impact of Acclara, cost of services was flat as investments in technology were offset by reductions in operational costs in our Physician business to align to the lower revenue in that business. Non-GAAP cost of services also included approximately $4 million of incremental operational expenses incurred in the second quarter to assist with both Ascension and Change Healthcare cyberattacks. Non-GAAP SG&A expenses were $50.8 million, down approximately $3 million from the prior year. Expenses related to the Acclara acquisition were more than offset by lower allowances for credit losses. Other non-GAAP SG&A expenses remained essentially flat year-over-year and compared to the first quarter of the year. Our adjusted EBITDA for the quarter was $156.1 million, which was slightly ahead of our internal expectations even after the impact from the incidents we mentioned for the quarter. Our continued focus on cost discipline and operational initiatives to enhance performance across the organization helped mitigate the revenue impact and additional costs related to both Change Healthcare and Ascension cyber events that the industry has experienced this year. Lastly, we incurred $34.3 million in Other expenses. This included $14 million of integration-related costs, including severance related to actions announced with the Acclara integration. Other expenses included $6.3 million related to a onetime vendor termination fee now that our migration to cloud services is essentially complete. We also incurred approximately $8 million in advisory fees related to the special committee strategic review process we previously disclosed. Now let me provide a couple of comments on cash flow and the balance sheet. Cash and cash equivalents at the end of June were $163 million compared to $173.6 million at the end of December. For the quarter, we generated $36.8 million in cash from operations. Net debt at the end of the quarter was $2.1 billion and includes a paydown of the $75 million in revolver that we borrowed in early April related to the Change Healthcare incident. Our liquidity continues to remain strong with approximately $682 million at the end of June, both from cash on our balance sheet and borrowing capacity on our revolver. In light of the transaction announced last week and as Evan also mentioned earlier, we will not be providing guidance for 2024. However, I do want to provide some color on our expectations for the second half of the year related to the impact of the Ascension cybersecurity incident. We expect the full-year revenue impact of the Ascension outage to be between $75 million to $95 million. Most of this impact is expected to be a delay in timing of revenue from the second half of 2024 into the first half of 2025. The majority of the impact will be seen in our net operating fees or base fees based on timing of cash collections. As a reminder, our base fees lag the timing of cash collections. So, any cash collected by Ascension after August will be recovered in our 2025 net operating fees. Although less material, we also expect some impact to our modular and other fee revenue as Ascension does contract for some of our modular solutions and was unable to transmit volumes to our platform during their outage. We will also see an increase in expenses related to the Ascension outage. We expect to incur $10 million to $15 million in incremental cost in the second half of the year. We expect this will mostly be driven by overtime and incremental labor as we have added several hundred onshore contractors on-site across many facilities of Ascension to assist in the backlog of paperwork created from manual processing. This effort is critical to recover the backlog of claims accumulated during the outage. Through our large network of third-party partners, we were able to assist in rapid deployment of talent to locations in need of help. This is a testament to our scale and ability to serve our customers. We also expect to incur some technology costs to ensure all systems are fully recovered, secure and operating effectively. While the impact of the Ascension outage will create a significant impact on our near-term financials in the second half of 2024, we do not expect that the outage will create a long-term impact to the core operations and results of our business. We believe that most of the recovery will occur in 2025 and that the business will return to normal cash collection cycles over the course of the 2025 calendar year. Ascension plays an important part of U.S. health care and is R1's largest customer. We are committed to partnering with them through their recovery efforts to ensure they are able to continue to serve patients across all of their care settings. Our employees have worked tirelessly around the clock over the last few months to support Ascension through both the outage and the recovery process. I'm incredibly proud of the work we have done, and I want to personally thank our over 33,000 global employees for remaining focused on serving our customers. In closing, we had a good quarter, and we're very pleased with the work we are doing on behalf of our customers. The customer and vendor cyber events this year have proven the value that we provide to the healthcare industry. Providers need our services, scale and technology more than ever, and we remain focused on the opportunities in front of us. We look forward to continuing to deliver excellent results to our customers throughout the remainder of the year. Thank you, everyone, for joining. Operator, I will now turn the call back over to you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect. End of Q&A:

The Hackett Group, Inc. (HCKT) Q2 2024 Earnings Call Transcript

The Hackett Group, Inc. (NASDAQ:HCKT) Q2 2024 Earnings Conference Call August 6, 2024 5:00 PM ET Company Participants Ted Fernandez - Chairman & CEO Rob Ramirez - CFO Conference Call Participants George Sutton - Craig Hallum Jeff Martin - ROTH Capital Partners Vincent Colicchio - Barrington Research Operator Welcome to the Hackett Group Second Quarter Earnings Conference Call. [Operator Instructions]. Hosting tonight's call are Mr. Ted Fernandez, Chairman and CEO, and Mr. Rob Ramirez, Chief Financial Officer, Mr. Ramirez, you may begin Rob Ramirez Good afternoon everyone, and thank you for joining us to discuss the Hackett Group's second quarter results, speaking on the call today I'm here to answer your questions, are Ted Fernandez, Chairman and Chief Executive Officer of the Hackett Group, and myself. Robert Ramirez, Chief Financial Officer, a press announcement was released over the wires at 4:05PM Eastern Time. For a copy of the release, please visit our website at www.thehackettgroup.com We will also place any additional financial or statistical data discussed on this call that is not contained in the release on the investor relations page of our website. Before we begin, I would like to remind you that in the following comments and in the question and answer session, we will be making statements about expected future results, which may be forward looking statements for the purposes of the Federal Securities Laws. These statements relate to our current expectations, estimates and projections and are not the guarantee of future performance. They involve risks, uncertainties and assumptions are difficult to predict and which may not be accurate. Actual results may vary. These forward looking statements should be considered only in conjunction with the detailed information, particularly the risk factors that are contained in our SEC files. At this point I would like to turn over to Ted. Ted Fernandez Thank you, Rob, and welcome everyone to our second quarter earnings call. As we normally do I will open the call with some overview comments on the quarter. I will then turn it back over to Rob to comment on the detailed operating results cash flow, as well as comment on outlook. We will then review our market and strategy related comments, after which we will open it up to Q&A. This afternoon, we reported total revenues of $77.7 million and revenues before reimbursements of $75.9 million, which was above the high end of our guidance and adjusted earnings per share of $0.39 cents, which was at the high end of our guidance. Our results were driven by the overperformance of both our Oracle and SAP sectors. Oracle's overperformance is consistent with the momentum that it has experienced in the second quarter of last year, a recent important development is the notable increase in the demand we continue to experience in our historically strong Enterprise Performance Management offerings. Oracle has reemphasized its sales commitment to this area, and we are clear beneficiaries of this strategy. Our SAP solution segment also performed above our expectation as it closed several value added reseller transactions which benefited the quarter, we are seeing some of the sales investments we made in this segment last year start to pay off. Our global strategy and business transformation segment was down 3% when compared to last year, as we have seen, economic headwinds continue to result in extended decision making, as I mentioned last quarter that has been particularly noticeable in our e-procurement area. On the positive side, we are continuing to see increased activity from companies considering GenAI investments. We have conducted hundreds of meetings with global 1000 organizations as a result of their interest in our recently launched GenAI ideation and design platform, AI Explorer that's capital, XPLR, these meetings have provided us with a unique detailed exposure to these organizations GenAI adoption plan, implementation concerns as well as their limitations. Given this unique perspective, we have continued to make significant enhancements to our platform's Version 1 capability, and plan to release an AI Explorer Version 2 this month. The most important enhancement is our ability to simulate enterprise use cases for our clients by utilizing Hackett IP and utilizing our strong business process knowledge. This can only happen because of our ability to identify task automation opportunities at a detailed level, which also enables us to design meaningful use cases using our AI Explorer's GenAI assisted capabilities. Our AI projects have also exposed us to significant implementation assistance our clients require to successfully implement sophisticated GenAI use cases and solutions. Given the strategic access and the platform enhancements we think it is only natural for us to extend our AI implementations capabilities to be able to fully develop and implement GenAI use cases, but although the project conversions from our hundreds of meetings are still low at this point, we expect our sequential revenues in this area to continue to increase strongly. We also believe that our new AI Explorer Version 2 capabilities will improve our conversion rate and also expand downstream opportunities on our existing engagements, there is no doubt that in just six months, our aggressive pivot to become the architects of our client's GenAI journey is being well received and has extended our branding in GenAI. This has been enabled by our unique ability to identify meaningful AI use cases, determine their feasibility and also assess their benefit realization potential by utilizing our benchmarking database. On the Executive Advisory front, we continue to invest in our growing IP based programs. We believe our move to fully integrate GenAI content into all of our advisory programs, which began in April, will be responsive to our client's strong interest in this area. On the balance sheet side, you will hear from Rob that the short term, in the short term, you can expect us to use our strong cash flow and operations to continue to pay down our outstanding balance of our credit facility. Longer term, we plan to use our balance sheet to fund acquisitions and to buy back stock while continuing to invest in our business. With that said, let me ask Rob to provide details on our operating results, cash flow, and also comment on outlook. I will make additional comments on strategy and market conditions following Rob's comments, Rob? Rob Ramirez Thank you, Ted. As I typically do, I'll cover the following topics during this portion of the call, I'll cover an overview of our 2024 second quarter results, along with an overview of our key operating statistics. I'll cover an overview of our cash flow activities during the quarter and I will then conclude with a discussion on our financial outlook for the third quarter of 2024. For the purposes of this call, I will comment separately regarding the revenues of our global S&BT segments, our Oracle solution segment, our SAP solution segment and the total company. Our global S&BT segment includes the results of our North America and international benchmarking and business transformation offerings, Executive Advisory and iPaaS programs and our OneStream and Coupa implementation offerings. Our Oracle solutions and our SAP solution sections include the results of our Oracle and SAP offerings respectively. Please note that we will be referencing both total revenues and revenue before reimbursements in our discussion, reimbursable expenses are primarily project travel related expenses passed through to our clients and have no associate impact on their profitability. During our call today, we will also reference certain non-GAAP financial measures, which we believe provide useful information to investors. We have included reconciliations of GAAP to non-GAAP financial measures in our press release filed earlier today, and we'll post any additional information based on the discussions from this call on the investor relations page of the company's website, As Ted mentioned for the second quarter of 2024 our total revenue was $77.7 million. Our revenues before reimbursements, were $75.9 million, which was above the high end of our quarterly guidance. The second quarter reimbursable expense ratio on revenues before reimbursements was 2.3% as compared to 1.9% in the prior quarter and in the same period of the prior year, total revenues from our global S&BT segment were $42.3 million for the second quarter of 2024. Revenues before reimbursements for our global S&BT segment were $41.6 million for the second quarter of 2024, a decrease of 3% when compared to the same period in the prior year. As Ted mentioned, the segment has been impacted by extended climate decision making in our business transformation engagements, particularly impacted by our e-procurement offerings. Total revenues from our Oracle solution segment were $23 million for the second quarter of 2024. Revenues before reimbursements for our Oracle solution segment were $22.2 million for the second quarter of 2024, an increase of 9% when compared to the same period in the prior year. These results continue the momentum we've experienced since the second quarter of 2023 with strong growth over the last five quarters when compared to prior year periods. Total revenues from our SAP solutions segment were $12.3 million for the second quarter of 2024. Revenues before reimbursements for our SAP solution segment were $12.2 million for the second quarter of 2024, a decrease of 2% when compared to the same period in the prior year. Approximately 22% of our total company revenues before reimbursements consist of recurring, multi-year subscription based revenues, which includes our research advisory, IP as a service, multi-year benchmarks and application managed services contracts. Total company adjusted cost of sales, which exclude reimbursable expenses and non-cash stock based compensation expense totaled $43.8 million in both the second quarter of 2024 and 2023 representing 57.7% and 57.9% of revenues before reimbursements respectively. Total company consultant headcount was 1145 at the end of the second quarter of 2024, as compared to 1154 in the previous quarter, and 1148 at the end of the second quarter of 2023. Total company adjusted gross margin on revenues before reimbursements, which exclude reversible expenses and non-cash, stock based compensation expense was 42.3% in the second quarter of 2024 as compared to 42.1% in the prior year. Adjusted SG&A which excludes non-cash, stock based compensation expense was $16.8 million or 22.1% of revenues before reimbursements in the second quarter of 2024. This is compared to $16.3 million or 21.5% of revenues before reimbursements in the prior year. Adjusted EBITDA, which excludes non-cash, stock based compensation expense, was $16.3 million or 21.5% of revenues before reimbursements in the second quarter of 2024 as compared to $16.4 million or 21.6% of revenues before reimbursements in the prior year. GAAP net income for the second quarter of 2024 totaled $8.7 million, or diluted earnings per share of $0.31 cents, as compared to GAAP net income of $8.7 million, or diluted earnings per share of $0.32 cents in the second quarter of the previous year. Adjusted net income which excludes non-cash, stock based compensation expense for the second quarter of 2024 totaled $10.9 million, or adjusted diluted net income per common share of $0.39 cents, which is at the top end of our earnings guidance range. This compares to adjusted net income of $10.8 million, or adjusted diluted net income per common share of $0.39 cents in the second quarter of the prior year, The company's cash balances were $19.1 million at the end of the second quarter, as compared to $13 million at the end of our previous quarter. Net cash provided from operating activities in the quarter was $13.7 million, primarily driven by net income adjusted for non-cash activity increases in accrued expenses and income taxes payable partially offset by an increase in other assets and decreases in accounts payable and contract liabilities. Our DSO or day sales outstanding was 68 days at the end of the quarter, as well as at the end of the previous quarter and as well as the prior year. During the quarter, we repurchased 6000 shares of the company's stock from employees to satisfy income tax we're holding triggered by the vesting of restricted shares for an average of $22.94 per share at a total cost of approximately 144,000. Our remaining stock repurchase authorization at the end of the quarter was $12.9 million. During the second quarter, the company paid down $4 million on its credit facility. The balance of the company's total debt outstanding at the end of the second quarter was approximately $27 million. During the third quarter of 2024 the company has paid down an additional $5 million. At its most recent meeting, subsequent to quarter end, the company's Board of Directors declared the third quarter dividend of $0.11 cents per share for its shareholders of record on September 20, 2024 to be paid on October 4, 2024. I will now discuss our guides for the fourth quarter, consistent with seasonal for the third quarter, excuse me, consistent with seasonal third quarter trends. We expect the impact of the additional U.S. holiday and the typical increase in time off due to summer vacations in the U.S. and in Europe to unfavorably impact available days by approximately 2% on a sequential basis. The company estimates total revenues before reimbursements for the third quarter of 2024 to be in the range of $74.5 million to $76 million. We expect global S&BT segment revenue before reimbursements to be downside to compared to the prior year, but up on a sequential basis. We expect both Oracle solutions and SAP Solutions second revenue before reimbursements to be up when compared to the prior year. We estimate adjusted diluted net income per common share in the third quarter of 2024 to the range of $0.39 to $0.41, which assumes a GAAP effective tax rate on adjusted earnings of 27.7%. We expect the adjusted gross margin as a percentage of revenues before reimbursements to be approximately 43% to 44% We expect adjusted SG&A and interest expense for the third quarter to be approximately $17 million. We expect the third quarter adjusted EBITDA as a percentage of revenues before reimbursements to be in the range of approximately 22% to 23% Lastly, we expect cash flow from operations to be up on a sequential basis. At this point, I would like to turn it back over to Ted to review our market outlook and strategic priorities for the coming months. Ted Fernandez Thank you, Rob. As we look forward, let me share our thoughts on the near and long term demand environment and the growth opportunity it offers our organization. Although demand for digital transformation remains strong, it continues to be impacted by extended decision making as organizations assess competing priorities created by high interest rate and the demand disruption, which it is intended to affect, digital innovation across all areas of enterprise, cloud applications, analytics, workflow automation are dramatically influenced, influencing the way business compete, deliver their services. However, there is a clear, major change which is rapidly emerging, and that is the demand for GenAI solutions. Its unlimited potential will define an entirely new level of what we describe as GenAI enabled, digital world class performance standards, driving all software and services providers to extend the value of their existing offerings. We believe this will result in unprecedented innovations, which all organizations will have to consider. Strategically we continue to focus on recurring, high margin IP related services what is new is the accelerated focus and investment we are making in our GenAI capabilities. The most significant investments have been the development of our AI explorer platform and the training and development of our associates. Although they are consuming our organization, I'm also very proud of the way we are making this pivot in a highly efficient way, whether you look at profitability, cash flow, or any other aspect of our performance. This could only be done because of our IP and the talented individuals we continue to attract as well as retain. We are utilizing the AI explorer platform as the vehicle to integrate the GenAI impact across all of our offerings. We also continue to hire and upgrade our skills and critical data and depth tech architecture resources to further support our efforts. These efforts will allow us to become key architects, advisors and consultants of our client's GenAI journey. We also continue to see strong downstream revenue from our benchmarking and executive advisor clients to our business transformation and cloud application consulting services. This table effect, which has been approximately 40% over the last several years, continues. We believe that this will only be expanded by our AI explorer offering and the broad and strategic access it provides. Organizations who rely on our IP -- AI assessment solutioning and marketing intelligence platforms are also more likely to utilize our advisory and other consulting services. We also continue to publish our market intelligence reports. We have started to publish our research reports on GenAI and key solution providers in the space which is important to the content of AI explorer and our Executive Advisory programs. On the tablet side, competition for experienced executives continues. Overall we saw turnover continue to moderate and remain low during the quarter, and we expect that train to trend to continue. Longer term, we have transitioned to a hybrid sales and delivery model, which provides us with effective access to our clients and their respective teams. This hybrid model provides our associates with greater personal flexibility perform their defined responsibilities remotely, which is very valuable to them. This should allow us to attract and retain talent. We also continue to explore strategic partnerships that will allow us to extend our AI capabilities and sell our IP through new channels that will allow us to reach beyond the current global 1000 focus in an efficient manner. We also continue to redefine our global benchmarking leadership through enhancements in quantum leap which has been not entirely integrated, but obviously all the benefit realization capabilities of explorer are fully enabled through the quantum leap and some of the benefit case assessments that exist inside of our digital transformation platform. These platforms allow clients to leverage our IP to create compelling benefit case assessments, accelerate process flow and software configuration decisions and track the value realization of transformation initiatives over the life of their respective effort. We believe the integration of these platforms with AI explorer significantly enhances the value of our IP, it fully aligns with our perspective on the emerging GenAI world class performance standards which will be achieved due to these new AI technologies. As I have mentioned on previous calls, we are adding videos of our platforms on the investor relations page of our website. You can expect to see more of that in a new website before the end of the quarter, investors will be able to utilize these videos and access we're providing through the investor portal to become more familiar with our new capabilities. Lastly, even though we believe that we have the client base and offerings to grow our business, we continue to look for acquisitions and alliances that strategically leverage our IP and add scope scale and capability, which can accelerate our growth. As always, let me close by congratulating our associates on our performance and by thanking them for their tireless efforts, and always urge them to stay highly focused on our clients and our people, no matter what challenges they may encounter. Those conclude my comments, let me turn it over to our operator and movement to move on to the Q&A section of our call. Operator? Question-and-Answer Session Operator [Operator Instructions]. Our first question comes from George Sutton with Craig Hallum George Sutton Thank you, Ted, you mentioned you've had hundreds of meetings relative to the Explorer offering, and you have thus far had low project conversions but expect that to increase strongly. I wondered if you could put a little bit more detail around those comments. Ted Fernandez Well, I think what we're seeing is that the education side of our clients, which appear to be probably driving half of the calls that we were executing over the first three months since launching AI explorer, are really now changing clients. We're now engaging clients who have dedicated some capabilities to AI may have made some commitment to some GenAI development platform to develop their use cases, try to identify areas of the business which it wants to pursue, but the overwhelming majority is simply, I'll say, testing or trying to develop their capabilities in very narrow areas in order to prove both their capabilities and then also the value realization from this effort. So we now believe we've moved from primarily education, if you take, say, the first couple 100 calls, and to then more meaningful client conversations, let's say the next 200 calls. The conversations now include a more complete conversation of both ideation, design, develop of the solution and full deployment. That is why AI Explorer was built. It was to be responsive to a couple of things that we saw were critical to the clients. One, they wanted a better indication of the opportunities available to them, since many of them were highly focused in some narrow areas, or call them favored areas, and we have been a strong proponent that you should be considering making these investments with a much broader context, which means understanding what your enterprise opportunity is. That's what led to the simulation capability that we're now introducing in Version 2. So what does that mean that instead of talking educating a client about how we ideate and design solutions, we will now be engaged in the engaging them in an M1 with a full simulation of their opportunity full let's call it as complete as it can be, utilizing what we're using as industry process flows and in all of the client information. We have available to us before meeting with that client, we find that engagement where we were able to speak to specific numbers of opportunities across areas of the business and speak not only to how they are identified and how they're designed. We've also developed skills around making sure that the handoff meaning functional other the requirements, data sources, both public and private, all those considerations are addressed in a more detailed level. We believe all of that is more highly responsive to the issues that the clients are facing, and because of all of those things that I'm discussing, where they were starting, where they're now moving to, relative to understanding their commitment to time in dollars. How we believe that we can be more compelling and engaging clients. We believe we do that by presenting them with a broader use case number and opportunities that have been assimilated inside of our AI explorer platform. All of these changes, we believe will allow us now to walk into a client opportunity, no matter whether they're starting or sophisticated talking about where they are relative to the ability to assess enterprise opportunity, define their use cases, and also talk about some of the deployment and implementation considerations. So as they've developed capabilities, we've developed capabilities. The engagement of the clients, I'm going to say, with the exception of, I'm going to say a max of 20% of those clients where maybe there was not a direct fit relative to the requirements they were seeing, they seem to be looking at versus where we were developing capabilities are. We believe those are clients that understand the Hackett capability and how it's changing. So I believe, not only do we have a more complete way and extending the way to serve clients, I believe that our opportunity to go back to these clients and now reengage them with more capability all of those, when we see what they're doing and how they're doing it, we believe that our offering is going to be competitive and so it's all of the above And, yes, when you mentioned the fact that we believe the revenues is going to be strong, well, the dollar amounts of our entry points have changed because they become more customized to the client reaction or request. By the way, with more I'll call it customized or higher amounts come also longer times to kind of validate the opportunity and close those engagements. But we've had enough success in what we call Phase 2 that our revenues will continue to increase strongly sequentially. George Sutton One other question, relative to implementations, just thinking through, you mentioned strength in the Oracle practice, and I believe that's because of a push in part from their sales force. And I just want to confirm that. And then relative to, you know, the IPO of OneStream and your success in growing that practice. Can you just give us an update there? Do you benefit from the IPO and the focus there? And then lastly, you called out e-procurement, which is, I believe, predominantly Coupa, they've pulled back on their sales resources. Is that what's driving that area? That's a bit of a challenge. Ted Fernandez Well, I'll simply say that excluding the performance of that group, our S&BT practice was probably up 3% or better, instead of down 3% just to give you some perspective and respond to that, respond to that question without providing individuals numbers about that practice. So I agree with your observations. How do we benefit? Look we benefit when both OneStream is successful and Oracle successful. We believe they are the Top 2 EPM or CPM providers in the marketplace, we have this very strong capability in the EPM, both in the transformation as well as the software implementation side, and that relationship emanates from the very strong relationship we have with the CFO community. So we really like the fact that Oracle's reemphasize every emphasize that area, and we're benefiting from it. And yes, we also believe that the OneStream IPO only benefits and creates an opportunity for OneStream to continue to grow its business, and if they do so, we're going to be an active participant in that growth. Operator Our next question comes from Jeff Martin with ROTH Capital. Jeff Martin Ted wanted to dive a little deeper on AI Explorer 2.0 you mentioned that'll be available later this month. How much do you think the new features, particularly a simulation, make a difference in open close conversions, and have it. Ted Fernandez I believe it's two-fold, Jeff. I believe that clients are listening to our capabilities that are considering that within the context of their plans, and they're becoming more informed, and the more detail we provide on how, I think, how strong we are in that ability to identify and design, which includes driving all the way through functional requirements and data sources, we believe extends our capability and provides more value and capability that we're offering our clients. So one, those two things are important, I think, also so we're that's also extending our capabilities all the way through to proof of concept and validation, and again, those the more we extend our capabilities and directly respond to what the clients need help with. We believe for example, some of the things that are in the pipeline now our clients that we made early presentations to, we didn't hear much from, we thought they were educational. They picked up the phone, called us back. When they called us back, we were demonstrating greater credibility. That greater credibility has given us a chance to present a larger scope, which they now accept. So you got to consider this somewhat of a startup. I mean, clients are learning how to do the work, engage the services, compare the capabilities, and we're aggressively building capabilities where we believe the client limitations and capabilities are. So you can just expect us to continue to extend those capabilities, and we just believe that all of the above will give us a chance to compete for that work further. And I still don't know if somebody has had the volume of calls we've had with clients and the detailed level of discussions around GenAI adoptions, the underlying GenAI development platforms, they're considering, and again, some of their issues and limitations and we're trying to go back and kind of respond to it all through both platform and internal capabilities. You'll see us continue to do that aggressively. Jeff Martin The point I was trying to get at was simulation seems like it's a huge value add for the client. I was just curious how long it might take to do a simulation for a client, and what all does that entail in terms of pulling data from their systems? Ted Fernandez Well, first, the first thing is to get them to believe that we can. So we've just started doing our first demos, and the reaction is, their reaction is, how are you doing it? And it may be hard for you to believe, but Explorer and the capabilities inside of Hubble [ph] when we provide Explorer with the right level of information that correlates to that client's industry, and more specific client information that we may get publicly or as a result of setting up the call is allowing us to get in front of the client, apologize for the fact that we did this without any direct involvement from them or direct information in the areas we're going to cover. But we think it's incredibly compelling for us to be able to turn to any or most, let me not say any, because it varies so much by district most areas of the business and have a conversation about the use cases there are available, and what we believe is the feasibility of the use cases. And as you know, we break down use cases as breakthrough, transformative and incremental. So then we also correlate to the benefit. So to some extent, I think that we're catching some of our clients a little bit off guard with the capability we've developed as quickly as we have, but I think that the conversations we're having and we've had are clearly extending our branding, and if we continue to build capabilities, whatever opportunities emerge in this space, in the areas we're covering, I just believe we're going to be highly competitive. Jeff Martin Okay, one more for me, if I could you mentioned strategic partnerships. Just curious if you could help us understand the overarching strategy there. Is that to penetrate more than middle market, you mentioned you're intending to extend reach beyond the Global 1000 just curious, if you kind of give us the strategic viewpoint of how you're? Ted Fernandez Well first beyond the Global 1000 as you know, we also have have had vendor strategies in our iPaaS program, so we've had an initial conversation where we're trying to determine whether we can take some of those relationships and support their AI, either extended or offerings by sharing our capabilities with their channel. So the answer is, yes, we you know, we've initiated those conversations, so we'll see where they go. So relative to extending capabilities because of the success of AI Explorer and the fact that you know all the work that we pay by giving these clients these one hour, or in some cases, more than one session and review of AI explorer and discussion around GenAI adoption and related issues, it has attracted some of the -- I'll call it some of the some of the firms that are now trying to transition their skills or build some new skills in the AI implementation area. And as we walk into clients, sometimes we get introduced to some providers, so we're kind of developing a good understanding of the ecosystem who's out there in figuring out the best way to work with them. Operator [Operator Instructions]. Our next question comes from Vincent Colicchio with Barrington Research. Vincent Colicchio Yes, Ted shifting gears here a bit. With your heavy focus on the AI consulting. Is there less emphasis currently on the market intelligence programs? Ted Fernandez No, we just - it's interesting. We just don't believe that you -- obviously there are requirements to help clients with organizational and enterprise app issues and areas that they want to continue to address. But when you engage a client more strategically or broadly, and when you look at how we believe the spend dollars will shift over time. We don't believe that you can separate our existing capabilities with the new capabilities. So what we've done is we've enveloped all of our I'll call it traditional capabilities, with AI explorer or GenAI capabilities, so that any conversation can result in either a) A AI Consulting opportunity, or a, I'll call it downstream or more traditional or legacy opportunity, for lack of a better term. So to me, it's, it's the ability to turn left or right as the client needs your assistance. I just believe that the trend and the demand that will build around GenAI is so significant that to not emphasize it and use that as a primary go to market, as we look out several years, would not benefit our organization the same way. Vincent Colicchio And then SAP, you said you closed some business towards the end of the quarter. Is this momentum shift sustainable? What are your thoughts on SAP? Ted Fernandez Look, both Oracle and SAP have performed pretty well throughout this if you want to call it economic cycle right, and now you got to call it economic and emerging GenAI cycles. So now you got two cycles going at the same time. So Oracle out is really, obviously, Oracle's outperforming the other groups. The SAP group is performing well, and we think it's and both have an opportunity to continue to perform where they're at or better, just given how successful they've been through what I believe, you know, has not been the best economic cycle. And when you also consider the new distraction that clients have now, because everyone is offering them to implement some use case or presenting some new AI embedded opportunity for them to consider. So there's a lot of competing wins it all leads to the deployment of technology and change, and the deployment of technology and organizational change is good for our business. Vincent Colicchio And lastly, what is driving the strong growth in your top client? I see some impressive growth there. Ted Fernandez Well, obviously it was a very meaningful Oracle implementation, but it's probably expanded into four of our groups, including our AI group. Operator At this time I show no further questions, I will now turn the call back over to Mr. Fernandez. Ted Fernandez Well, thank you operator. Let me thank everyone for participating in our second quarter earnings call. We look forward to updating you again when we report the third quarter. Thank you. Operator Thank you for your participation. Participants, you may disconnect at this time.